Back from the Brink

With statistics such as the Small Business Administration's oft-cited prediction that nearly 95% of all businesses will close or fail within five years of their opening, it's a wonder that anyone starts his own company. But such is the nature of the entrepreneur. And when a business owner finds her- or himself at the brink of disaster — 5, 10, 20, or more years down the line — it's those innate entrepreneurial skills that help them take charge and turn the business back around.

For Mike Bruno in New Jersey it was a bad partnership. For Washington's Len McAdams and Colorado's Bob Peterson it was a sour economy. For another Colorado company it was embezzlement. Many different forces — within and beyond a company owner's control — can push a business toward collapse, but the steps to solvency are similar regardless of those forces: decrease overhead, consolidate debt and work out payment plans with those to whom you owe money, and take only profitable jobs (see “Solvency Checklist” on page 93).

Back in 2000 Bruno worked as a trade partner with a general contractor. Without paying much attention to partnership agreements, establishing roles, or discussing how finances were to be handled, the two men merged their companies. In hindsight, Bruno should have known there would be trouble. But he was young, and he had been feeling pushed around as a subcontractor. He had a false sense of security with a partner he mistakenly thought was more experienced.

Bob Peterson, owner of Associates in Building and Design, had to lay off seven people in one week when the Colorado company lost 60% of its business during Fort Collins' high-tech bust. Peterson focused on the existing client base to revive ABD

Eventually, things unraveled; the partner walked away and secretly started another company on his own. Bruno was left with a shell of a business and a bad reputation. “I sat down and asked myself: ‘Why am I in remodeling?'” he says. The answer: “I'm a carpenter by trade, passionate about what I do. I love helping people.” He needed to get back to basics, and didn't want to declare bankruptcy.

“Declaring bankruptcy and starting over isn't the answer,” says Leslie Shiner, owner and principal of the Shiner Group, which provides management and financial consulting. “What will your subs do [about their payment]? Who will ever work with you? You must have a plan and attack it each month,” Shiner says.

Bruno did just that. He finished the old company's outstanding jobs by putting on the toolbelt and getting out in the field. He cut overhead by renting a small office, and he pulled his parents out of retirement to help — his mom managing the office and his dad in the field putting systems in place. He rebuilt tarnished relationships with architects and with subs to whom he owed money. He changed the name of the business and focused only on residential work. Most importantly, Bruno made commitments to himself and his community and to creating a company culture and brand. Now, three years later, he estimates Stone Creek Builders will close out 2007 at $3.8 million.

How did he know what to do? “I subscribed to Business Week and all the trade publications,” he says. “I tried to understand what a real company should be about.” He also joined a peer review group, the Better Business Bureau, and the National Kitchen & Bath Association to help him get ideas for turning things around.

Asking for help is difficult. Many people feel humility and shame in making mistakes. Joining a peer group and getting outside consultation was a good first step for Bruno. For others — and depending on what's dragging the business down — an accountant may be their first call.

But every owner in this position will have to contact suppliers, vendors, designers, architects, and any other trade partners to ask for their understanding — and a payment plan. If you've fallen behind on your IRS payments, the agency can work out an “offer-in-compromise” to gradually pay off debt, or even do debt forgiveness. “And if you've used a credit card to bail yourself out, it's a cycle that's almost impossible to get out of. You can negotiate a new interest rate with your credit card company,” Shiner says.

In one case, Shiner had a client who owed a trade partner $10,000. They worked out a deal in which the remodeler would pay the subcontractor $2,000 for the old job and pay right away for the current job in order to continue working. “You can also have the homeowner write a ‘secondary payee' check — to you and the subcontractor. The client may learn the cost of an item, but the subcontractor will get his or her money,” Shiner says. “The overarching idea is to pay the bare minimum amount of debt so you can continue to start and run new jobs.”

Debt is still a constant for Pam Austin (not her real name) and her husband, owners of a nearly 40-year-old Colorado design/build company. Two years ago, they discovered that their bookkeeper of one year had embezzled more than $500,000. To rebuild, the Austins lent the company personal funds, mortgaged a building they owned, and arranged for an increased line of credit. Although the former bookkeeper was convicted and sent to prison and the Austins received money from their insurance company, they know they will never recoup everything. “We'll never know how much she stole. She falsified records to show we were doing well,” Pam says.

It might seem overwhelming, so creating a written plan is helpful. “Determine all your debt on a spreadsheet,” Shiner says, “and develop a cash flow forecast — how much you can afford to pay off the entire debt.”

The Austins budgeted debt into the amount they need to produce to make a profit, even hiring five more people to help them meet volume goals. “We figured out what we needed to pay overhead and dig out from debt, budgeted for it, and made it a goal for sales,” Pam says. They created payment plans with vendors, and of course, got a new accounting system. Most important are the preventive security measures they've put in place so that this doesn't happen again.

A poorly planned partnership led Mike Bruno down the wrong path. Returning to basics, committing to himself and his community, and solidifying a brand helped Bruno jump-start Stone Creek Builders.

Photo Credit: Compoa

First, and foremost, they have severely curtailed any accountant's access. Says Pam, “Open the mail; deposit any checks; mail all bills, statements, and written checks yourself. Keep a check log that only the owners have access to. Have as few bank accounts as possible, have all bank statements mailed to your house, and look at them very carefully. Have actual checks come back to you. Don't give a bookkeeper sign authority on any account. Make vacations mandatory, which gives you a chance to audit an accountant's work. Get fidelity and fraud insurance, and do comprehensive criminal background checks on the person.” Even with all these new rules in place, Pam says that “if someone was determined to steal, they would find a way. But [the way we have it set up now] it's not attractive and easy. They'd probably go somewhere else.”

Having systems is what kept the Austins from going under, Pam says. And although it will take at least five years to dig out from the debt, she says they'll probably make a profit this year.

However you prioritize your old debt, keep in mind that you'll be incurring new debt in order to continue working. “The first priority should be to pay for current work,” Shiner says. “Stay current with vendors and stay current with the IRS; it's not a good bank. There's a 10% penalty if you're three days late.”

In 2003, major companies such as Hewlett-Packard and Intel in Fort Collins, Colo., laid off 4,500 people.

“Our clientele generally sold stock options and paid cash for remodels. But when stocks went down and the layoffs occurred, our phone didn't ring,” says Bob Peterson, owner of Associates in Building and Design. “The high-tech industry was 60% of our business.”

Peterson decided to lay off some of his staff of 20. “I laid off seven people in one week. It was the most miserable week of my life,” he says. With the help of his Remodelor 20 peer group, Peterson developed a measuring grid/spreadsheet to help him determine whom to lay off. He rated employees on an A, B, C, D scale. “You'd think you'd be smart enough not to have ‘D' employees, but during the process I found a couple of them. It forced me to evaluate my staff. I do that every six months now,” he says.

He also whittled overhead “line item by line item. We cut the office-supply budget from $400 a month to $300 a month and have kept it there. We reuse binders, recycle paper. If it's non-financial or an in-house document, it's got something on the back side of it. We skinnied down the health benefits plan from 100% to 30%, but that 30% is almost the equivalent [dollar amount] of the 100% we were paying four years ago.”

To get more business, Peterson looked to his existing client base. “We called and said, ‘We did your kitchen last year and would like to come over to see if it's behaving the way it's supposed to.' We'd send a lead carpenter over.” Sometimes people had other jobs for ABD to work on or they had warranty work. “We were able to build a bond that said we were there to take care of them.” As the company gained traction, Peterson focused more of his marketing dollars (budgeted at 2% of revenue) on those existing clients and instituted a lead tracking system and more customer analysis. The company now has a 70% repeat or referral rate.

Len McAdams, too, faced a market collapse in Seattle, but he thought he could save the company by taking a huge project “from the customer from hell.” “We spent virtually all of 2001 working feverishly to get that job done without a lawsuit,” he says. Then the tragedies of 9/11 occurred, leaving the company with nothing for 2002.

McAdams didn't take a salary, his office manager went half-time, he laid off some field personnel, his estimator worked part-time in the field, and he rented out some space in the office. “We lost virtually our entire production crew,” he says. McAdams had people remodeling his own house to keep them busy. “We had very friendly prices for the consumer. We decreased our volume, and our margins were terrible,” he says.

It didn't take him long to realize that “the biggest job you've ever done is not necessarily the way to work your way out of a problem,” he says. “Maybe I didn't know the best thing to do, but I did know I couldn't just sit on my hands and let the last of my capital disappear. I gathered the best people I could and worked to get back.”

Trying to save McAdams Construction after Seattle's market collapse, owner Len McAdams took on a huge job for a problem client. Then 9/11 occurred. Knowing that the company had once been profitable and the vision of a successful outcome kept him going.

Photo Credit: Compoa

Shiner would agree that taking a huge job is a mistake, but the important thing is that the jobs you do take are profitable. “It's better to take small, profitable jobs. You'll need less energy to pursue them, the money flows in faster, and it's easier to keep a handle on things. And you have to use the profit from those jobs to help you pay off any debt.”

The good news, McAdams says, is that this year, McAdams Builders will bring in $3 million. “[After 9/11], I was as close to despondent as I was able to be. The things that allowed us to [get through it] were: one, the knowledge that we could bear down and survive; two, that we had once been profitable and had capital; and three, that we had a vision of a successful outcome.”

Just because you've made it through one tough challenge, though, doesn't mean you'll be able to make it through the next one, even a similar one — unless you draw from your cache of entrepreneurial skills, change some of your habits, and learn from your mistakes.

Peterson has put employee evaluations in place and says he learned that he had to “look more on the business side of things. If I find a ‘C' or a ‘D' player, it's easier to convince them that they need to elevate their performance or update their résumé.” McAdams says, “a board of directors would have been useful at the time.” He has since joined a peer group. Bruno has worked on his planning skills and systemization. The Austins have changed their entire accounting system.

“Sometimes you have to hit rock bottom in order to straighten out forever. Either that or you have to have some epiphany that causes you to go to business or personal counseling,” says consultant and REMODELING columnist Victoria Downing, who is vice president of Remodeler's Advantage Roundtables, a peer review company. “We beat them up like they're in boot camp and build them back up,” she says. “You need someone to hold you accountable so you'll make better decisions.”

• Have a plan and attack it each month
• Prioritize your debt
• Stay current with current vendors
• Communicate with and make a payment plan with trade partners
• Take smaller jobs
• Take profitable jobs
• Cut overhead
• Get back to basics
• Ask for help
• 
  Tough-Market Tips
• Measurement is management. Even when you have the metrics, bad news is hard to come to terms with, so you need enough ways to track performance that you can't lie to yourself.
• Systematize. When personnel cuts need to be made you'll be able to prioritize which tasks are nice to have, necessary to have, or need to be shifted to others.
• Market harder and market creatively.
• Budget for profit. Break-even is a loss.
• Business basics are what will get you through.
• Tighten your belt, modify lifestyle, work harder.
• Fire negativity. If someone on staff gets negative or unproductive, they must be let go.
• Exercise and sleep. Keep yourself healthy to better manage stress.
• Spend more on advisers who will hold you accountable and help you improve your numbers.
• Consider radical amputation. Maybe it means shrinking back to just what the owner and two or three key staff members can produce, or doing fewer types of projects and identifying your niche. Diversification is best left to financially strong companies that are looking for strategic growth in new markets.

• From Ben Thompson, owner of Thompson Remodeling, located in Grand Rapids, Mich., which is currently facing one of the slowest economies in the nation.