What to Tell Your Lender, and When

Nobody really likes to share bad news. And when that news pertains to problems with your business, you may think the last person you should share that with is your lender. Maybe you are thinking you can turn things around before your lender has to find out. You wouldn’t want them to worry, would you?

Wrong. When your business encounters difficulties, you need to be in touch with your lender even more often. Lenders hate surprises. The key to maintaining a good relationship with your lender is to keep him informed every step of the way when you are handling a financial crisis. You can never give your lender too much information.

Open communication is the best way for your lender to be an advocate for your business and help you through the situation. Remember, your banker wants you to succeed and will do what he can to help you. But he can only do that if you keep him informed.

In my book, “How Not to Hire a Guy Like Me: Lessons Learned From CEOs’ Mistakes,” I talk about the 10 C’s of Bank Relationships for CEOs. Communication is one of those C’s, and in fact, almost every one of the other C’s hinges on it. (To learn the other nine, you can buy my book!)

I worked with a company I’ll call Giant Manufacturing, which had been a booming business for decades prior to 2007. But some unprofitable long-term contracts, coupled with the broader economic decline in the United States, resulted in severe declines in cash flow.

The company did not inform the bank until it was in dire straits. As you can imagine, the bank was not happy. Because it was so surprised and caught off guard by the situation, it cut back on availability of funds for Giant Manufacturing, which gave the company even less money to operate.

Had the CEO been proactive and called the bank immediately and continued to keep them informed, he could have potentially kept the bank on his team as he worked to get the company back to profitability. But because he kept them in the dark, they no longer trusted his ability and shut down access to much-needed operating capital.

After I took over, one of my main challenges was to obtain funding. Most sources had already declined to fund the company. But after 16 months, we were able to turn around Giant Manufacturing to having a positive cash flow position and a new lender was more receptive because of the speed of the turnaround. He could trust that the company was operating in a fiscally responsible way.

But an important part of obtaining that credit was educating the new bank. Yes, we shared our successes with the turnaround, but also the challenges we faced and the ones that had led to severe decline in revenues.

Giant Manufacturing learned its lesson and maintains a healthy relationship with its bank. And like any healthy relationship, it depends on ongoing and honest communication.

Mark Twain said, “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”  With respect to Mr. Twain, I’d alter that quote just a bit. The banker is quite happy for you to hang onto that umbrella, just as long as you keep him informed of any storms you are encountering and allow him to work as a team member to help your business weather them.

 

The First Step in Developing an Exit Strategy

If you are a small business owner, do you have a plan on how you are going to leave your company? If you don’t, you are in the majority.

A recent study conducted by Securian Financial Group of 500 small business owners found that more than sixty percent of them have no plans to leave their companies and are not working on any type of exit strategy.

“One third of the business owners we talked to plan to leave their businesses in the next five years and 60 percent plan to exit in 10 years, but many of them have no exit plans in place,” said Andrew O’Brien, director, Client Solutions, Securian Financial Group. “With no exit plan, the small business owner not only risks the future of the firm but also its ability to generate income for the founder.”

In my work as a turnaround authority, I’ve seen way too many examples of unplanned exits from companies. Owners and CEOs have abruptly left due to scandal, suicide or medical situations. Sometimes they succumb to the stress and take an extended leave, or unexpectedly exit a company far earlier than they or anyone else anticipated.

These situations never go well. If you want your business to thrive in the future, long after you have left, you need a plan for your exit strategy. Even if you plan to work until your last breath, you still need an exit strategy.

Entrepreneurs are often too busy with just the day-to-day running of the company to look five and ten years down the road. And developing an exit strategy does take time. That gets me to the first step in developing your strategy.

You need to determine when you want to exit. That determines how you need to start planning. For example, if you know you would like to sell your business in five years, you would most likely have plenty of time to plan and implement strategies to make your company attractive to a potential buyer. But if you delay that planning, even just six months, then you only have 90 percent of that time remaining. The longer you wait, the fewer options are available to you.

Taking a long-term approach allows you the time to consider all the options available to you. Do you want to sell the company outright? Would you rather liquidate everything?

Other options could include going public or grooming a family member to take over running the company. You may want to consider merging with another company or make your business attractive to another for acquisition.

If you give yourself time to plan you also have time to hire the right advisors — financial planners, lawyers and consultants such as me who can direct you in selecting the best option for you and your future.

Giving yourself time to plan your exit strategy can help ensure the financial health of your company in the future.

You don’t want to find yourself in five years ready to move on to another challenge but not in a position to leave because you didn’t plan ahead. Thinking of the future is one of the most critical jobs of a business owner.

As an illustration I’ll close with one of my favorite quotes from Warren Buffett: “Someone is sitting in the shade today because someone planted a tree a long time ago.”

The Most Dangerous Words in Business

As a turnaround authority, I’ve dealt with tens of dozens of businesses that are floundering. Many of them I can save from financial ruin. A few I can’t. They called me too late and while I can salvage parts of them, it’s not possible to bring them back to financial health.

In my several decades of the turnaround business, I’ve come to recognize eight words as very dangerous to the future of a company. “But that’s the way we’ve always done it.”

The ironic thing is I generally hear these words when it is abundantly clear that the way they’ve always done it is clearly not working. But what I learn immediately from these words is that these folks are resistant to change. And every company has to change to survive.

Part of that process of change is reviewing your business model on an annual basis. Examine what is working and what is not, what areas are making money, which ones are not profitable. Look at what competition has done to you the prior year and what effects it may have in the future. And make changes as necessary to that model, no matter how you’ve always done it.

It can be a painful and difficult process sometimes. Just look at Scoutmob, an Atlanta-based company that was founded in 2010 and is now nationwide.

It began with a similar business model to Groupon of offering discounts for local businesses to consumers primarily through an app on their smartphones. They differed in that consumers did not pay in advance, but only paid once they arrived at their location.

In 2012, Scoutmob launched Shoppe, an ecommerce site for small quantities of items from mom and pop shops offered at a discount. They soon found out that this division was much more profitable. While they were not making money from their primary business, Shoppe is reported to have brought in $5 million in revenue last year.

So the company made the tough decision to focus on this division, changing its homepage to reflect that Shoppe is now its focus, as reported in the Atlanta Business Chronicle. Unfortunately, that move meant laying off about half of its staff of 40. One of the founders, Michael Tavani, also exited last week.

Every business must review its business model annually. Yes, it can lead to some tough decisions and you never like to see talented, loyal people lose their jobs. But as Jack Welch said, “Change before you have to.” He also said, “An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.”

Continuing along the same path without examining your direction and heeding to the phrase, “But we’ve always done it this way,” do not lead businesses to grow.

But they do lead businesses to call me and help them turnaround the mistakes they have made. Which would you rather do?

A Key Ingredient to a Successful Negotiation

To be successful in the turnaround field, you need to have a lot of skills: the ability to assess the financial health of a company; the capability to make the tough decisions, the willingness to listen to the parties involved and the capacity to motivate people toward common goals are just a few of them.

But one of the most crucial skills is the ability to negotiate. I employ this skill every week and my several decades in the turnaround business have made me very good at it. I didn’t earn the nickname the Monty Hall of Business for nothing. Most days for me involve some form of  “Let’s Make a Deal.”

I engage in negotiations with lenders, clients, employees, vendors — all sorts of parties are involved in the deals I’m working on. We are able to come up with a suitable solution in the majority of cases and all parties leave on amicable terms and could consider doing business together in the future.

So, how does that happen? I make it a rule to always negotiate in what I consider a positive and open way. I genuinely want all sides to a negotiation to feel good about the outcome.

So what’s the key ingredient to a successful negotiation? Aretha Franklin said it best in song, “R-E-S-P-E-C-T.”

If I can negotiate within the context of mutual respect for all parties, we are able to achieve much better outcomes for everyone than if any party becomes hostile or aggressive. If someone begins name-calling, raises their voice or personally attacks one of the parties, then people feel disrespected. And when that happens, emotions flair up and the process breaks down.

Rather than searching for mutually beneficial outcomes, negotiation can spiral down into a very expensive game of one-upmanship. Just ask any divorce attorney. They can regale you with stories of couples spending thousands of dollars fighting over a painting or other household item that neither one of them really liked or cares about. What they do care about is beating the other person.

From the outset I work to establish a positive rather than adversarial position. It’s much easier to find common ground and get buy-in for the negotiated agreement under those conditions.

I make it known we are looking for the best win-win solution we can achieve under the circumstances. If people feel heard, validated and respected, they are much more open to brainstorming to come up with creative solutions.

I show respect to all parties by listening and validating their needs, maintaining a calm demeanor and gracefully giving in on points that aren’t crucial to my party’s interests. To show our good faith and desire to reach a good outcome, I sometimes share information to the other party to assist in the process, information that senior management did not want to share but agrees to do so only in this situation. In those cases, we tag it “For settlement discussion purposes only” to limit its use for any other purpose, such as a lawsuit.

Yes, I do have to play hardball sometimes. That can happen when some parties to the negotiation are not working in the best interests of the company, or who are undermining the process by not negotiating in good faith. They may be spreading false information or currying favor with senior management to skew the results in the direction they desire.

I’ve dealt with plenty of manipulative people and I can generally spot when someone is poisoning the negotiation process.

Remember Aretha Franklin during your next negotiation. Everybody wants a little R-E-S-P-E-C-T.

 

 

 

 

Let’s Get Personal — About Those Guarantees

How many personal guarantees have you signed? If you are like most business owners and CEOs, you most likely have a lot more than you think. The majority of CEOs I’ve worked with have lost track long ago of personal guarantees they have signed.

If you have an American Express business card, a business loan from a bank or you process credit cards, you have made a personal guarantee. You’d be surprised where personal guarantees show up, and you may have signed some without truly understanding the consequences. Vendors, creditors, banks and landlords could all have asked for a personal guarantee.

I had a client once who told me he was setting up credit card processing for his business and the bank wanted him to sign a personal guarantee for any customer charge backs and the recovery costs for the life of the contract. He was able to negotiate with the credit card processor that he would sign a limited personal guarantee for one year. If he paid his bill on time every month, then after one year the guarantee would automatically drop off.

While this particular contract would probably not have involved a lot of money if he had complied as originally requested, it’s an example of how prevalent these guarantees are and how you may be able to negotiate better terms when asked to sign one.

Should you ever experience trouble with your business, those guarantees could spell trouble. I’ve seen way too many unfortunate consequences of business owners who did not keep track of or understand the consequences of these personal guarantees. They have lost homes, money, yachts and prize-winning horses to the person who held the strongest personal guarantee when their business failed.

One CEO thought his house was safe because it was in his wife’s name and he thought she hadn’t signed anything. But I found that she had signed a document at one point that put their house in jeopardy.

If a business is just starting out and has no credit record, then it’s customary to be asked for a personal guarantee by the bank or person who is risking their money or property. The bank has no other way of ensuring that the money will be paid back. But there is room for negotiation, as my client discovered.

All personal guarantees last forever but you can ask that the guarantee be dropped after a certain amount of on-time payments, as he did. Another option is to ask that the amount of the personal guarantee be limited to a percentage of the total amount or if you are willing to pay a higher interest rate, you could ask for the personal guarantee to be dropped altogether.

The important thing about personal guarantees is that you keep track of them and how much you have at risk. And if your business has been around for awhile and has established good credit, then you could ask to have the personal guarantee removed.

 

Increased Employee Freedom Helps Retain Top Talent

“Adequate performance gets a generous severance package.” That line is from a PowerPoint Deck with 127 slides written by Netflix CEO Reed Hastings and the former Chief Talent Officer Patty McCord that explains the company’s philosophy of talent management.

The deck has been viewed more than five million times, as reported in an article by Patty in the Harvard Business Review, “How Netflix Reinvented HR,” where you can also review this fascinating deck for yourself.

Maybe it’s been viewed so often because companies are looking to emulate the success of Netflix. After all, it is the world’s leading Internet TV network and has 44 million members. Last year its stock more than tripled.

Or maybe people are curious to learn about a company that has an unlimited vacation policy. As one of the slides in the deck reads: “There is no policy or tracking of vacation. There is also no clothing policy at Netflix, but no one comes to work naked. Lesson: you don’t need policies for everything.”

But that is exactly what happens as companies begin to grow. With each problem they encounter, they institute a new policy. More and more policies mean less freedom for their employees. Netflix found that as the most talented employees felt their freedom decreasing, they would leave.

Netflix began developing a philosophy of fewer policies in an effort to keep top employees. Since going public in 2002, traditionally a time when a company would put even more policies into place, it took the opposite approach: Netflix increased the level of talent at the company and increased employee freedom.

As two of the slides read, “Responsible people thrive on freedom, and are worthy of freedom. Our model is to increase employee freedom as we grow, rather than limit it, to continue to attract and nourish innovative people, so we have a better chance of sustained success.”

So unlike many companies that have strict vacation policies with complicated accrual formulas, Netflix has none whatsoever. Top management is encouraged to take several vacations each year, to refresh them and to serve as an example to their staff.

In an article in Businessweek in 2012, “How to Set Your Employees Free: Reed Hastings,” he wrote about Netflix’s “freedom and responsibility culture” and said they focus on what people get done, not how many hours they work. “We want responsible people who are self-motivating and self-disciplined, and we reward them with freedom.”

Patty McCord said in an article on www.fastcompany.com, “Netflix’s Major HR Innovation: Treating Humans Like People,” that she believes in most large companies 97 percent of the employees do great work on their own and don’t need much help from the human resources department. It’s the other 3 percent that takes most of HR’s energy, costing the company money. Netflix’s approach is to not hire those people in the first place.

I’ve seen something similar so many times in my career as the Turnaround Authority. A small percentage of people can sap the majority or resources of HR. It’s good advice for any company to work hard to find the other 97 percent who can thrive in an atmosphere of freedom and responsibility. And if you do hire people who don’t perform as they should, well, perhaps you can use Netflix’s philosophy on that as well. Reward mediocrity with a generous severance check.

Humility Being Sought in New Hires

“It’s hard to be humble when you’re perfect in every way.”

— Lyrics from “It’s Hard to Be Humble” by Mac Davis

I was reminded of this song when I read an article in Fast Company about the hiring practices of Google. The title of the article is “Why Google Wants New Hires Who are Humble and Argue.”

Google has been notorious for its quirky hiring processes and interview questions that included questions like “How many piano tuners are there in the entire world?” and “How many golf balls can fit in a school bus?”

Over the years, Google has gone back to evaluate how well their hiring practices worked in determining the success of its employees. Turns out, not so well.

In 2009, Peter Norvig, Google’s director of research, wrote in his book, Coders at Work, “One of the interesting things we’ve found, when trying to predict how well somebody we’ve hired is going to perform when we evaluate them a year or two later, is one of the best indicators of success within the company was getting the worst possible score on one of your interviews. We rank people from one to four, and if you got a one on one of your interviews, that was a really good indicator of success.”

In 2013, Vice President of People Operations Laszlo Block told the New York Times that they found those famous brainteasers they had been using as part of the hiring process were a complete waste of time. “They don’t predict anything. They serve primarily to make the interviewer feel smart.”

Academic performance and GPAs had been stressed, even for hires in the 30s and older. The company admitted that their research found that after two to three years, academic performance and grades were unrelated to performance.

So what is Google looking for now? In addition to technical expertise, leadership and ownership, the company sets a high priority on humility.

“Without humility, you are unable to learn,” said Laszlo Bock, again in an interview with the New York Times for the article “How to Get a Job at Google.” They have found that the most successful people at Google are those who are willing to argue for their point of view, but when they learn a new fact or hear an opposing view, are able to be persuaded. “You need a big ego and small ego in the same person at the same time,” Bock said.

Other people have recognized that humble people make the best and most successful employees. Michael Hyatt, a former CEO and New York Times best-selling author wrote in the article “What Should You Look for in the People You Hire” that he has a standard formula for when he is recruiting people: “H3S.” Two of these qualities are being honest and being hungry. By that he means someone who is always setting goals and wishes to exceed expectations. The third quality is being humble.

“A humble person is open to correction and not defensive. He is quick to admit mistakes and apologize … He is conscious of the contributions others have made to his life, his projects, and his career. He is quick to give credit to them and express sincere gratitude,” he wrote.

I’m glad to hear Google has come around to what is really an old-fashioned way of hiring — finding people who are willing to listen to others and learn from them.