3 Tips to Help Ensure Your Company Recovers from Bankruptcy

“Capitalism without bankruptcy is like Christianity without hell,” said US astronaut Frank Borman and former Chairman and CEO of Eastern Airlines.

While I understand where he is going with that, I wouldn’t explain bankruptcy quite that harshly. True, like hell, no one wants to go there. But there is an escape and it doesn’t have to feel like you are stuck in eternal flames. Or whatever your version of hell may be.

Sometimes the best option to preserve your company is to file bankruptcy. Your business can emerge strong, with happy employees and your reputation intact. Here are three tips on how to accomplish that.

  1. Keep a positive attitude 

I learned this from one of my first turnarounds, a story I tell in my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.”  Cheerleader Supply, a $65 million a year company with 750 employees, made cheerleading uniforms and supplies and directed camps nationwide. It fell on hard times and I was called in to see it through a Chapter 11 restructuring.

That CEO taught me the value of being a cheerleader in your company as he keeps a positive attitude throughout. When the home team is down, the cheerleaders get up and motivate the crowd, right? They don’t head to the nearest Starbucks and call it a night.

When a company is going through bankruptcy, employees are scared and nervous, which leads to lower productivity. You need your team to be on top of their game. And that requires pep talks. You need to keep your team inspired and motivated so they will keep working hard for you.

I’m happy to report that Cheerleader Supply successfully emerged from Chapter 11 bankruptcy, and I learned that a positive attitude from the leader is crucial.

  1. Be transparent with your employees about what is going on

Another way to keep your employees motivated is to be transparent with them about what is happening. If you and your senior management are meeting behind closed doors and not communicating with your employees, you are fueling the panic and the rumor machine.

People can handle a lot if you are honest with them. What they can’t handle is lack of information. If you don’t let them know what is happening, they will spend a lot of time filling in the blanks themselves, time they could have been working to help your company.

  1. Keep your reputation by communicating with your investors, vendors and customers

To follow up on #2, you also need to communicate with your other constituents, including your investors, vendors and customers.

United Airlines filed for bankruptcy in 2002, then the largest bankruptcy filing by any airline. Prior to filing, the CEO flew to Chicago to meet with employees, while top executives flew to other hub cities. Then after they filed for bankruptcy, the company took out full-page ads in major newspapers around the country explaining the situation and what they were doing about it.

By being open and communicating with all its constituents, United Airlines came out of bankruptcy with its reputation intact a little more than three years later. Its reported net income last year was $4.5 billion.

Back to that quote about hell. Maybe filing for bankruptcy does feel like that. But remember what Winston Churchill said. “If you are going through hell, keep going.”

Funny, But True: Penny Wise, Pound Foolish

We’re all familiar with that phrase of British origin that means you may be saving a few pennies in one area, but wasting bigger money in another. But in one case I dealt with, it was more like, “Thousands wise, millions foolish.”

I took over the presidency of an apparel company that was in serious trouble. During this crisis period, we needed to send out a time-sensitive catalog. Sales from this catalog would generate 80 percent of the annual revenue of $65 million for this company within a four-month period. That’s how important getting this catalog printed and mailed out was.

But we needed $25,000 cash immediately to make sure that happened. We had to pay for postage. The company didn’t have it, and there was nowhere else to get that much cash, desperately needed to generate more than $52 million in sales.

The CEO was worth several million dollars. But he froze when I asked him if he could put up the $25,000 to get these catalogs out the door. It was such a no-brainer to me that I was stunned. Because guess who would be wiped out if we didn’t make the projected $52 million in sales from that catalog? The CEO was personally guaranteed on $40 million.

It took all my powers of persuasion, but as we were just up against the deadline, he finally agreed. The good news is he followed my advice after that and we were able to successfully follow our restructuring plan.

So next time you’re tempted to save a few pennies, remember that other famous quote. The Roman playwright Plautus (born 254 BC) said, “You must spend money to make money.”

Why You Should Always Prosecute Fraud

Sometimes people think I’m harsh when I tell them to always prosecute fraud in their companies. My fraud policy is quite simple, “If you steal, you will be prosecuted to the fullest extent of the law.”

Instituting a fraud policy is one of the easiest things a company can do. But I am continually dismayed to find out how many companies don’t have one. It seems to be an issue they’d rather avoid. Until it happens to them.

When fraud occurs in a company, many CEOs are reluctant to prosecute it. The main reason I’ve found is that it can be embarrassing to admit it happened in your company. They’d rather other people didn’t find out about it. And they don’t want to get involved with lawyers and filling out paperwork. It can also be hard to prosecute someone you know. They worry about hurting the employees’ families. So they find it easier just to let the thief go and keep the entire incident quiet.

Let me remind you what one investor said about Bernie Madoff. “Bernie would never do that. He’s my friend.” That investor lost everything. As they say, with friends like that …. For more on that topic, read my blog, “Nice People Commit Fraud.”

There are several reasons you need to prosecute fraud when it occurs in your company.

One is that when people see you following through on the fraud policy, it deters others from committing fraud. And the opposite may be true if you don’t prosecute it and your employees know about it. They may figure, “Well, Susie got caught. She did get fired, but I heard she found another job right away.” So while in the short run it may be a hassle to prosecute the employee, it can pay off in the long run when you don’t have to deal with this issue again.

And another reason is that if you don’t prosecute them, odds are very high they will go and steal from someone else. Susie got another job because her new employer didn’t know she’d embezzled from the previous one.

I recently read an article in the Atlanta Journal-Constitution about Thomas Conrad, “Decades after ban from industry, Alpharetta man again accused of fraud.” Seems Thomas is a repeat embezzler. He was banned from the investment industry in a disciplinary action in 1971. He apparently behaved himself for four decades. But then he struck again.

He and his son, Stuart P. Conrad, have been accused by the U.S. Securities and Exchange Commission of defrauding investors of $10.7 million through a group of hedge funds they managed. While he cut off any payments to investors starting in 2008, the money was still flowing freely to him, his wife, his son, other relatives and a few of their favorite investors.

They also involved another money manager in one investment that turned out to be a Ponzi scheme.

And did he tell those investors that he had been banned from the investment industry decades ago? You can guess the answer to that one. That is also a violation of federal securities law.

In this case a fraud prevention policy wouldn’t have helped as he had been banned from his industry. But this story does illustrate that once a person commits fraud, he is much more likely to do so again.

Don’t pass along your problem to someone else by just letting a thief go. Prosecute the people who steal from you. They may strike again. Even if they wait four decades to do so.


Funny, But True Stories: Keep Your Girlfriend Out of the Picture

Cheating on a spouse has been the downfall of many a business owner or CEO. Some of these stories aren’t too surprising. Consider the case of the founder of the famously hacked website Ashley Madison, created specifically to make it easy for people to cheat on their spouses. At one time the cheaters’ website claimed earnings of $115 million and a membership of 39 million around the world.

So can anyone feel surprised when it was revealed that founder Noel Biderman had cheated on his own wife, despite his claims to have a strong marriage? He called himself the King of Infidelity and in June 2014 when asked if he had ever cheated on his wife, he said, “Not yet.”

He got outed by the hackers, as did thousands of others whose extra-curricular activities were uncovered. Many divorces and some suicides have been linked to the hack.

Obviously it’s not good for anyone to cheat. Not on their taxes, not on their spouses. But it’s even more critical when you’re a CEO or business owner. You stand to lose a lot more than your marriage.

Yet, it happens. All the time. Take the case of the married president of a pipe manufacturer I worked with. In addition to running his business, he wanted to craft a racer with an innovative design.

He was successful and was asked to be on the cover of a prestigious industry magazine. Sounds great, right? Except when the photographers came to shoot the cover, his girlfriend was there, in her revealing bikini. Did he ask her to make herself scarce for a bit? He did not. And who shows up in the background on the cover with him? Yep, the girlfriend in the bikini.

It didn’t take long for his wife to figure out what’s up. And oh yeah, her husband had started the business with her father’s money. She filed for divorce and he lost control of the company. I’m not sure what he did with that magazine cover, or whether he got to keep that racer or not.

5 Reasons CEOS Wait Too Long to Address Problems

The worst cases in my career in the turnaround industry are when I work with businesses that could have been saved. If only we had been called in earlier. Those are the ones that really bother me, because these business failures didn’t have to happen. Had we been brought in earlier, we could have determined where the problems were and had many more options to fix them.

But often we are like firefighters who are called in after a home is in ashes, rather than at the first sign of smoke. Then all we can do is sift through the ashes.

Sometimes the best we can do is to get the most for a business in bankruptcy or through a fire sale, pun intended. And I always think, “If only they had called us earlier.”

The saying we have is “If the alligators are snapping, it’s too late to drain the swamp.” You have to pay attention when things are going wrong and fix them early on, before they become larger problems later, possibly even insurmountable.

If you catch a problem early, you have options. You can drain the swamp. But if you wait too late and the alligators have moved in, well, now you have to face them head on. Those alligators aren’t going to just relocate and find food elsewhere.

So why do CEOs and business owners wait until it’s too late to ask for help? Here are five reasons:

  1. Hoping the situation will change

Your sales manager isn’t meeting his quota and he is experiencing a lot of turnover in his department. He keeps promising he’ll hire more sales reps and “we’ll exceed our quota next month!” But he doesn’t and the competition is taking over your accounts. He should have been fired or refocused and now your competition is taking your accounts.

  1. Thinking you can fix it yourself

When I get time, I can focus on the problems in our accounting system, you think. It’s not working correctly and you aren’t getting the financial information you need to make the best decisions for your company. If you could only take a day to focus on where the problem is and what you need to do to solve it. Every day comes and goes, each with its own set of priorities, and you never do get around to focusing on the issues with accounting. And your business is suffering.

  1. Not wanting to admit mistakes

Sometimes with big jobs comes big egos. And an unwillingness to admit that you’ve made a mistake. Larry, the CEO of seminar company, hated change and would not admit to mistakes. He firmly believed that people were more likely to respond to the hundreds of thousands of mailings he sent if they were posted from their home states. So he had trucks driving hundreds of miles so mailings would carry a local postmark, to the cost of around $400,000 a year.

Fortunately, I was called into this company in time, and despite the fact their EBITDA was -$4 million, I was able to pull off a successful turnaround.

  1. Reluctance to ask for help

Some people see it as a sign of weakness to ask for help. As reported in the article “Why is Asking for Help So Difficult” in the New York Time, “There is a tendency to act as if it’s a deficiency,” said Garret Keizer, author of ‘Help: The Original Human Dilemma.’ “That is exacerbated if a business environment is highly competitive within as well as without. There is an understandable fear that if you let your guard down, you’ll get hurt, or that this information you don’t know how to do will be used against you.”

  1. Denial of the problems

It’s the head-in-the-sand tendency. “Calvin and Hobbes” creator Bill Watterson said, “It’s not denial. I’m just selective about the reality I accept.”

The sooner you accept your reality, the quicker you can get help. You don’t want to come face to face with those alligators.

Funny, But True Stories: Of All the Gin Joints

This story falls under the What Are the Odds? category. In this case, they were not in my favor. And I got busted.

My intentions were good. I had taken over a manufacturing company and was trying to save it from $1 million loss on one order. This company had one large client, responsible for 60 percent of its revenue. A discount mart, it provided the company with steady work and allowed it to grow significantly.

The discount mart even asked this company to change manufacturing capabilities to suit its needs, and because it was such a large customer, the company invested millions in upgrades so it could print T-shirts in several different ways for the discount mart. The investment seemed to be paying off. However, there was no written contract between the parties.

Until one day. The company had produced $1 million worth of branded/licensed T-shirts, just for this discount mart. Just prior to shipping the large order, the discount mart said, “No thanks.” That’s when the CEO knew he had a crisis, was reviewing his bankruptcy option and sought my help.

I told him it was a good thing he still had the merchandise and could do something with the T-shirts to cut his losses as there was no written contract he would be violating. But the discount mart wouldn’t have it. It was like an old lover. They don’t want you anymore, but they don’t want anyone else to have you either. If we did anything with those T-shirts, they’d say adios forever.

I figured we could still sell them in markets where this discount mart doesn’t compete, so we’d at least get 50 cents on the dollar. The strategy worked and we found a market in South America willing to buy the shirts for enough money to cover our costs and avoid a bankruptcy filing.

Everything would have been fine, except for one thing. The son of one of the discount mart executives vacationed in South America and bought dear old dad a souvenir T-shirt. You guessed it – one of those T-shirts. The discount mart made good on its threat and severed the relationship. I was able to keep the company out of a bankruptcy and the company sold six months later at a significantly reduced price.

The lesson here is about more than T-shirts, however. It’s about never becoming too reliant on a single customer, vendor or product – what I call the Big Gorilla. My rule is if a customer, vendor or product involves 25 percent or more of some part of your business, you’re dealing with the risks of a Big Gorilla…. sooner or later.

Fraud and the Family Business

Collard spring rolls. Delicious fried chicken and crispy waffles. An internationally famous singer’s name. Sounds like you’ve got all the ingredients for a successful business.

And for a long time, Gladys Knight’s Chicken & Waffles, opened in 1997, was just that. The restaurant chain had high ratings on Yelp, long lines of hungry diners and celebrities holding court in its booths. Sadly, things behind the scenes are not always as rosy.

Gladys Knight’s involvement was limited to letting her son, Shanga Hankerson, use her name. He ran the restaurant chain, which generated $8 million in sales at three locations. But he wasn’t running it too well apparently – he made national news in June when he was arrested for theft, and state revenue agents filed civil racketeering charges against him. Shanga allegedly owed $1 million in unpaid taxes and had been siphoning money from the restaurants to pay for unsavory activities. He wasn’t paying the employees and the restaurant was failing health inspections.

Shanga is out on bail and while two of the three locations have reopened, the chain made headlines again this week as it was disclosed Gladys is suing her son to remove her name from the restaurants and to stop using her recipes and memorabilia.

In addition to the financial losses the restaurant chain suffered, the Empress of Soul took another more immeasurable hit. To her reputation. Gladys has her name on seven Grammy awards, a star on the Hollywood Walk of Fame and in the Rock and Roll Hall of Fame. One place she doesn’t want to see her name is on a business mired in scandal.

Fraud can happen in any type of business and the types of fraud are similar to those in non-family businesses. According to an article in Strategic Finance magazine, “Shattered Trust: Fraud in the Family,” common fraud schemes include stealing office supplies, providing business secrets to a competitor, diverting customers to a competing entity, paying ghost employees and as happened in this case, stealing business funds.

Fraud always involves a betrayal of trust. But in a family business, that betrayal cuts much deeper. Many business owners and CEOS are happy to employ family members because there is an assumption they can trust them beyond anyone else.

An article in Forbes listed myths of family fraud. The one that caught my eye is one I have seen over and over in my career. “Our people wouldn’t commit fraud.”

Everyone wants to hire trustworthy people and continue to trust them to do the right thing. That’s one of the reasons they like to hire family members. You should be able to trust them above anyone else, right?

The bottom line is not always. Not even your own spouse/sibling/child. Here is another story to illustrate that fact.

A physician husband set up a practice with his wife in Connecticut. The business thrived and they enjoyed a nice lifestyle. One day the wife was running some errands and the husband saw an envelope on her desk from a bank he wasn’t aware of. It contained a bank statement for an account with $200,000 in his wife’s name. He learned she was planning on divorcing him, so had been stealing the money from the practice for the new life she was planning.

Other motivations for family members stealing may be addiction problems, feeling entitled or feeling underpaid and underappreciated. Whatever the motivation, the answer is the same as it is for every company. Institute strong fraud prevention policies and enforce them for everyone, family included.

For tips for setting up fraud prevention policies, please see “My Number One Tip for Fraud Prevention” and “13 Fraud Prevention Tips.”

As for Gladys Knight, it’s too late for her. She won’t be singing “You’re the Best Thing That Ever Happened to Me” to her son any time soon.