My last white paper was about the faux pas of CEOs in crisis, but in writing that paper I started thinking about some of the biggest mistakes CEOs, presidents and business owners make that result in crises. Since you may not be facing a crisis right now – and I hope you never are – I wanted to share these blunders with you so that you could either avoid them or start rectifying them.
1. Growing a Business Without Proper Equity or the Right Financial Structure
It’s never wise to try to grow your business without enough money. I once carved an injected molding company in Toledo, OH like a Thanksgiving turkey because the president sunk $2.5 million into his pet project: making the perfect bottle-cap. He effectively leveraged the entire company by borrowing against it to pursue this dream. Not only did he bet the ranch, but he tried to grow and evolve his business without sufficient funding to keep it running. Let that be the first lesson: make sure you have enough capital before making any big moves.
2. Growing a Business Without a Sufficient or Competent Management Team
The corollary to having enough capital to grow your business is having the right management team to do so as well. I’ve run Ocean Pacific twice. The first time was because they were expanding overseas without the proper personnel who understood sourcing and distribution in international markets. Though they lost a ton of money before we arrived, we were able to scale back to domestic manufacturing and refocus the company on design and licensing.
Many years later we were brought back in for a similar reason. Not only had the company lost control of its brand, entered into poor licensing arrangements and become embroiled in trademark issues, but they had accumulated a ton of debt. Once again, the management team couldn’t handle its responsibilities. The company was restructured through bankruptcy, selling its licenses to a private equity firm. Learn from Ocean Pacific and don’t embark on new strategies for growth without acquiring the right management team first.
3. They Allow Idiot Family Members to Run Key Divisions of the Business
Putting family members in key positions of your business can be dangerous without written expectations and a timeline for control, advancement and responsibilities. It takes a unique father and CEO to balance the intersection of a family and a business. Problems arise in many places, but particularly as it comes to entitlements, compensation and selling the business.
I had a mechanical engineering company in New York that was in the middle of a restructure that included a large union shop. The father had died and put his wife in charge as CEO. The son, resentful of his diminutive role due to a lack of delineated expectations and a board-approved succession plan, and, in his eyes, inadequate compensation, was stealing a lot of money. When we confronted good ol’ Charlie, he took a kitchen knife to his mother. Fortunately, she lived, got a restraining order, and kicked him out of the company.
Mixing business and family is not easy. Be careful and have the sense to know when someone is incapable of doing the job he feels entitled to do, family or not. Always manage expectations by putting everything in writing.
4. They Skew the Facts to Boards, Creditors and Constituents to “Sell the Deal”
As I’ve discussed before, honesty really is the best policy. The CEO of a hard drive manufacturer in California desperately wanted a line of credit from his bank for $60 million, so he stuffed the channel in order to make his company appear worthy.
Stuffing the channel is when a manufacturer oversells product to put sales on the books, despite knowing that much of the merchandise will come back unsold; this inflates the books by overstating the top line, thereby improving the bottom line. This strategy led to the loan, but when the company repurchased the inventory on the channel within 60 days, it became out of compliance on the line of credit. Once the bank defaulted the company I was brought in to salvage what I could and to hopefully restructure the company. The company survived thanks to some hedge fund loans, but the CEO lost his job because he skewed the facts.
Not bending the facts is so important that it deserves a second story. Before the technology was so ubiquitous, lazer-tag equipment had a very high value, and a Texas-based company seeking a large loan claimed it had more inventory on its books than it did; the company added the inventory in its Ireland-based location to the US books. The US auditors never verified the inventory and granted the company a far larger loan than it could handle. When the company filed for Chapter 11, I was brought in as CEO; within weeks of my new position I discovered we were $75 million short in inventory. I immediately went to the judge to convert the case to a Chapter 7 rather than try to bring the company through the bankruptcy and be embarrassed by the fraud. The creditors ultimately sued the accounting firm and made millions of dollars from faulty accounting, once again highlighting the blunder of skewing facts.
5. The President/CEO/Owner Can’t Keep It in His Pants
I have more examples for this one than any other lesson I know, but I’ll highlight this case with two basic stories to indicate how easy it is to get caught and how ruinous it always is. The president of an apparel manufacturer had other interests: he wanted to design the perfect yacht. He certainly succeeded in making a great one, such that he ended up in a prestigious yachting magazine. However, when he and his innovative yacht were photographed for the cover shoot, he failed to ask his girlfriend to get off the yacht or at least cover up her delightfully revealing bikini. When his wife saw the cover of the magazine, she filed for divorce and he lost control of the company.
In another case I was brought in to resolve as president, the CEO and Chairman of the Board of a retail establishment was caught with his kids’ babysitter while his company was going through a Chapter 11 restructuring. Once the matter became public, he lost focus on the business and the employees and the creditors lost faith in him. Ultimately, the business was sold off in pieces.
Gentlemen: keep it in your pants. Not doing so can be very expensive. For the record, I have similar stories about the other gender, but I’ll save them for another time.