The #1 Reason Businesses Fail

Around 80 percent of businesses make it through their first year. In five years, only half of those have survived. And only about a third make it to their 10th anniversary.

I’ve written before about the reasons startups fail in my post, “The Top Reasons Startups Fail.”  These include a founder who is inflexible during the startup process, has no contingency plan and who fails to bring in a partner when necessary.

Another major reason startup businesses fail is there is no real need for the product or service they are offering. Many companies fail to do the proper research to determine whether that product or service is really needed prior to launching it.

But well established companies fail too. According to the 2015/2016 Global Entrepreneurship Report, which is published by Babson College and other organizations, more than half of businesses ceased operations due to lack of profits or financial funding. George Bernard Shaw said, “The lack of money is the root of all evil.” It’s also the number one reason businesses fail.

Starting a business without sufficient capital is a major reason startups fail. Even if a business thinks it has enough capital, it needs a contingency fund and a plan to obtain additional funding when needed.

But it’s not just startups that run into funding problems. I tell the stories in my book, “How Not to Hire a Guy Like Me,” about a few companies I worked with that faced major funding shortages. Some of these may be short-term cash flow problems, like needing to cover payroll for a few days. Or they may be more severe. I once worked with a company that relied on its Christmas catalog sales for 65 percent of its business. But UPS wouldn’t deliver the catalogs because the company had consistently broken promises about paying past-due invoices.

A similar situation happened with a company that manufactured oil products. It was behind on its payments to one of the vendors who supplied a key ingredient. The company couldn’t get more of that ingredient to complete a large contract because they didn’t have the funds to keep up with its payment schedule.

Fortunately, I helped both companies overcome their financial shortfalls and both are thriving today.

There are so many other reasons businesses fail. They have the wrong team in place. They didn’t anticipate changes in the market. Their business plan was poorly executed. The senior management is ineffective.

As a turnaround authority, I can evaluate the situation of struggling companies, implement a plan to get them back on firm financial ground, and see them go on to prosper. That’s why I do what I do. But many wait too late to ask for help, or sadly, never ask for help at all. So I’d add that to my list of why businesses fail. They don’t ask for help or they ask too late.

If you think your company could use help, don’t wait to ask for help. An outside consultant has the experience and knowledge to help you find solutions, whatever your issues may be. CEOs need to be proactive to survive.

5 Things to Know About DIP Financing

If you aren’t familiar with the term DIP financing, well, that might be a good thing. That means your company hasn’t had to explore the possibility of bankruptcy.

DIP (which means debtor-in-possession) financing is for companies in financial distress, primarily for those who have filed for Chapter 11 bankruptcy. Even if you think you may never have to worry about bankruptcy, it’s good to understand what DIP financing is. It is important that you obtain financing PRIOR to filing for bankruptcy protection. To do otherwise seriously jeopardizes your ability to survive.

Remember, even if you are contemplating filing bankruptcy, that does not have to mean the end of your business. Many companies successfully emerge from bankruptcy and DIP financing can be one of the tools your company uses to get it through a difficult time.

Here are five things you should know about DIP financing.

1. This form of debt can allow a company to continue operating until the assets of the company are sold or the business is successfully reorganized. Companies in distress need money to continue operating. But they may already have cash flow problems, and once they have filed for Chapter 11, other forms of credit may dry up, they may begin to lose revenue as customers go elsewhere and they may have additional expenses related to the bankruptcy. So, they may need another source of cash quickly. DIP financing is often the best answer.

2. DIP financing can sometimes be obtained from an existing lender. Sometimes an existing lender will lend money in the form of a DIP loan. They may do so to protect their interests, finance a sale or to protect a liquidation of your assets. The majority of DIP lenders last year were interested parties, according to DebtWire’s North America DIP Financing Report for 2016.

But a current lender may be reluctant or unable to increase its debt level with a company that has filed Chapter 11. A DIP from another lender can be the answer to obtain financing when other sources are not available.

3. Unlike some forms of debt, DIP financing takes top priority, despite it being the newest form of financing for a company. Remember, “Last in, first out”. This is referred to as super priority. A DIP load will be paid back before any other existing debt. This of course is critical to the lender as they have reassurance they will most likely get paid back, even if the company ends up being liquidated. Note that Administrative Claims of the Bankruptcy could be carved out prior to your Super Priority Claim. A good lawyer can assist in this process.

4. Interest rates can vary widely. Rates in 2016 varied from 12% to 18%, according to DebtWire’s DIP Financing Report. Most had maturity rates of less than a year, while some were as short as three months. Note that interest rates for smaller DIP loans (less than $1.0 million), which have more risk to the lender could approach 20%+ range.

Amounts vary widely as well. I’ve worked with companies that needed DIP loans of less than $1million but most required millions of dollars to finance their survival.

5. DIP financing can help restore confidence to the companys vendors and customers. Knowing that a lender has examined the business and its ability to repay the money, and is willing to lend it more money can help calm concerns in the market. Customers and vendors that may have been tempted to take their business elsewhere may be reassured that the company has the funds to continue operations, keep vendors current and is committed to emerging from bankruptcy.

If you’d like assistance in obtaining DIP financing, please contact me directly at LKatz@GlassRatner.com or (404) 307-6150. We have many sources throughout the country. We also have several local lenders that specialize in smaller credit facilities.

Giving Employees Bereavement Time is Good For Business

Facebook made the news recently for adding a generous paid bereavement leave to its list of benefits. An employee can get up to 20 days of paid leave when a member of their immediate family dies and 10 days for a member of their extended family.

COO Sheryl Sandburg, who tragically lost her husband Dave in 2015 during a trip to Mexico, announced the policy on where else? Her Facebook page.

“We’re extending bereavement leave to give our employees more time to grieve and recover and will now provide paid family leave so they can care for sick family members as well. Only 60 percent of private sector workers in the United States get paid time off after the death of a loved one and usually just a few days.”

Her post got over 35,000 likes.

I’m a big proponent of employees taking time off for vacation, and have written about it several times. In “Three Reasons You Want Employees to Take Vacation I discuss how it’s better for their health and makes them more productive to have a break from work.

Bereavement leave is in a different category than vacation, of course. And there is no federally mandated requirement for payment for time off after the death of a loved one, even to attend the funeral. However, about 60 percent of all workers do receive around three days for the death of an immediate family member and one day for extended family members.

The 2016 Employee Benefits Report done by the Society of Human Resource Management reported that 81 percent of employers give paid bereavement leave for their employees.

The typical amount of leave given was one day for an extended family member or relative of an opposite-sex partner; two days for a miscarriage, relative of a spouse or relative of a same-sex spouse; three days for an extended family or partner and four days for a spouse or a child. Most companies did not provide any leave for the death of a friend or a colleague.

(Many companies are giving time off for the death of a pet. But that’s a topic for another day.)

A study done by Boston Consulting Group on a situation that also involves leave – family leave for mothers and fathers – found that “employers see a solid business case for offering paid family leave, including benefits such as improved talent retention and attraction and their own ability to manage the costs of the program through thoughtful policy design.” This study was conducted by reviewing the policies of more than 250 companies.

An article about the study, “Why Paid Family Leave is Good Business,” points to five reasons giving family leave is good for business. I believe a few of these can apply to bereavement leave as well.

  • Employee retention. When employees feel valued as individuals by being given time off when they need it, then tend to stick around.
  • Improved engagement, morale and productivity. An employee who isn’t allowed paid time off after the death of a loved one can suffer from low morale. And even though they may be in the office right after a death, they won’t be very productive. Giving them time off allows them to be with family during a difficult time.

“Companies that stand by the people who work for them do the right thing and the smart thing – it helps them serve their mission, live their values, and improve their bottom line by increasing the loyalty and performance of their workforce,” Sheryl wrote in her Facebook message.

I do have to add one caveat, however. I once worked with a company where a guy took leave three times in one year, each time claiming his grandmother had died. “How many grandmothers do you have?” I asked him after the third time.

“Oh, [expletive],” he said, realizing he’d been caught. “Yeah, you used that same excuse three months ago,” I informed him. He did not get paid leave that time.

In my career as a turnaround authority, I often employ the motto “Trust, but verify.” In the case of bereavement leave, this is a good motto to remember. You don’t want a few people who are taking advantage of a policy to ruin it for everyone else.

Giving employees time to grieve is the right thing to do. It shows an employee you care, and can lead to increased productivity. Sounds like a win-win to me.

Should the CEO Be Fired? That Depends

In the wake of multiple problems splashed across headlines worldwide, speculation has run rampant that Uber co-founder and CEO Travis Kalanick may be on his way out. Issues include claims of sexual harassment at the company, massive loss of users and even a widely circulated video of the billionaire getting in a fight with a driver over fares for black cars.

In an article on Mashable, 5 Ways to Save Uber From Itself, the number one suggestion to save the global company is to fire Kalanick. “If you cut off the head, the body can function … at least temporarily,” the writer claims. Other business analysts claim that while he was once the ride-sharing company’s biggest asset, he is now their biggest liability.

But is firing the CEO the best solution? I advise companies that the decision to fire a CEO is never a simple one and should not be done in haste. There are several factors to take into consideration. And firing a CEO can often set the company back, especially in a time of difficulty.

A recent article in Fast Company, “Why Uber Shouldn’t Fire Its Bad Boy CEO,” made the case that Uber may actually benefit from keeping Kalanick in the CEO’s chair.

The article references this article on the Harvard Business Review, “Holes at the Top: Why CEOs Firings Backfire,” which explains why CEOs are often swiftly shown the door when times are bad.

“When companies do well, their CEOs are showered with money, perks, and adulation. When they do poorly, they’re given the blame—and the boot.”

The writer, Margaret Wiersema, is a leader in corporate strategy and CEO replacement and succession. She studied all instances of CEO turnover for a period of two years and found most CEOs were replaced not by the board after careful thought and deliberation, but at the insistence of investors upset over returns.

She compared performance of the companies from two years before a dismissal to two years after, compared performance with industry averages and then compared the performance of companies whose CEOs had retired as opposed to those whose had been fired.

Wiersema came to the same conclusion that I have after decades of working with companies in turmoil. “Most companies perform no better – in terms of earnings or stock-price performance – after they dismiss their CEOs than they did in the years leading up to the dismissals. Worse, the organizational disruption created by rushed firings – particularly the bypassing of normal succession processes – can leave companies with deep and lasting scars. Far from being a silver bullet, the replacement of a CEO often amounts to little more than a self-inflicted wound.”

I’ve seen companies where CEOs were fired for far fewer infractions. For example, perhaps the CEO didn’t make the numbers for a year or two. The business was still profitable, but it was below expectations and not as profitable as projected. Those CEOs often get fired within 3-6 months, rarely leading to the increase in profits that was hoped for. As for Kalanick, while Uber may be in a public relations crisis, and thousands of users have protested conditions at the company by following the instructions on the social media hashtag #deleteuber, the company is still growing. The head of North American operations claimed growth during the first 10 weeks of 2017 was better than the first 10 weeks of 2016. So maybe he is here to stay. At least for now.

Firing a CEO is not an easy or simple decision and shouldn’t be rushed, especially if big changes are being made to turn a company around. Those changes can take time.

Ultimately, it’s up to the board of directors. They have to make the decision based on a number of factors. But more often than not, it pays to keep the CEO because he can be a part of the solution, even if he was originally perceived as part of the problem.

My book “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes,” is now available as an ebook.

#1 Lesson for Leaders From the Academy Awards

It will undoubtedly be Hollywood’s most famous unscripted moment ever. In front of a worldwide audience of close to 33 million people, Warren Beatty and Faye Dunaway were handed the wrong envelope and presented the award for Best Picture to “La La Land” at the Academy Awards.

Except that movie wasn’t actually the winner of the Best Picture Academy Award, as we all now know. A partner with PricewaterhouseCooper had handed the stars the wrong envelope, a mistake that will follow him the rest of his life.

academy-awards

Jordan Horowitz demonstrating leadership when he stepped up to the microphone to correct the mistake at the Academy Awards.

In the midst of emotional acceptance speeches, producer of “La La Land” Jordan Horowitz learned of the mistake. He immediately stepped right up to the microphone and said, “There’s a mistake. Moonlight, you guys won best picture.” He stayed on stage during the resulting chaos and graciously said, “I’m gonna be really proud to hand this to my friends from ‘Moonlight.’”

The young producer is being heralded for his grace under pressure. He did what a good leader does under a stressful situation: he took charge and handled the problem.

In TV interviews afterwards, Jordan said, “My heart was a little broken, but it’s one of those things that just gets thrown at you. You can choose to lean into it or break away from it.”

In my career in the turnaround industry, I often deal with leaders in a crisis situation. Things do get thrown at them. They lost their number 2, their biggest customer went to a competitor, they can’t make their loan payments. Whatever it is, a business is going to face tough times.

I’ve seen a full range of responses from leaders in these situations. They may choose to be dishonest with their lenders, they may put their heads in the sand or they may continue blindly down the same path that put them in that position, hoping for a miracle.

The first step these leaders have to take is to face reality. They have to take a good luck at what the situation is so they can deal with it. Then a good leader has to take charge.

As Jordan said, “It happened really fast. Listen, I’m a producer. I gather things together and I change directions and I march things forward.”

In a nutshell, that’s what happens with CEOs. They gather the information they need, make decisions and march forward. Luckily, most leaders don’t have to do so on live TV in front of tens of millions of people.

Another company trying to march things forward right now is PricewaterhouseCooper, the second largest accounting firm in the world. The New York City-based company has overseen the Oscars balloting and presentation for 83 years, an association it takes great pride in and leverages with new and existing clients.

Tim Ryan, U.S. chairman and senior partner, was in the audience at the Academy Awards when the incident happened – that moment when two members of his firm came out of the wings and his business would soon move into the spotlight.

“I knew something was up,” he said in an article in the New York Times discussing the moment when he saw the two PwC employees interrupting the best picture acceptance speeches. “It’s not their job to come out on stage.”

The reviews for PwC’s performance that night came in and they were not good. Many people had comments along the lines of “You had one job.” Les Moonves, Chairman and CEO of CBS, said “If they were my accountant, I would fire them.”

PwC apologized for the error and took full responsibility. Monday night, 24 hours after the mistake, PwC issued a statement that read in part, “For the past 83 years, the Academy has entrusted PwC with the integrity of the awards process during the ceremony, and last night we failed the Academy.”

(Soon after, the firm placed the blame on partner Brian Cullinan, U.S. board chairman and managing partner for PwC’s Southern California practice. I was surprised that they singled out one of their employees so quickly, which shows a lack of support for a partner of their firm.)

What happens to Brian’s career, PwC’s reputation and whether they are around for year 84 of the Oscars remains to be seen.  Both leaders stepped forward to take charge. But while Jordan handled the crisis perfectly, Tim took responsibility for the mistake, but in doing so threw his partner under the bus – which is not the way to handle a crisis.

Funny, But True: Shaking My Pom-Poms

I never fantasized about being a cheerleader. But there I was, in a court of law, waving my pom-poms wildly with the rest of the courtroom.

I’ve done a lot of things in my career I never would have predicted. Handing out pom-poms to a judge and to everyone in attendance in a courtroom ranks high on the list of unforeseen events.

Cheerleader Supply was a $65 million a year revenue business, selling cheerleading supplies and uniforms. When the company’s financial situation was in dire straits, I was brought in for a Chapter 11 restructuring. That was early in my career and I learned a lot from working with that company.

It was a tough fourth quarter at the Super Bowl for Atlanta Falcons fans. But those Falcons cheerleaders never stopped yelling and waving their pom-poms.

It was a tough fourth quarter at the Super Bowl for Atlanta Falcons fans. But those Falcons cheerleaders never stopped yelling and waving their pom-poms. (Photo courtesy of Yahoo Sports)

One of those early lessons is no matter how bad things are at your office, as CEO, it’s your job to be a cheerleader for your team. You have to keep up the morale of your team, no matter how bad things look. Your team members will be looking to you for inspiration during the fight to keep your company growing and thriving.

With Cheerleader Supply, my job as leader was made easier by the fact that everyone involved wanted to see the company succeed – the judge, lawyers and bankers were all on board with my restructuring plan. It was a lot of hard work, but we made it. On the day we emerged from bankruptcy, I gave everyone in the courtroom and the judge pom-poms to celebrate our win after coming back from so far behind. I still have that pom-pom in my office as a reminder that no matter how tough things get, one of my major roles in working with companies is that of cheerleader.

Dr. Robert Gerwig, who writes the Lead Strategic blog, wrote, “Great leaders are cheerleaders. If you’re not one, start today. You don’t have to be an extrovert to provide encouragement, support, recognition and inspiration. Do it your way, do it authentically, but become a great cheerleader. You’ll be amazed at the results and long-lasting benefits.”

I was recently looking at the bio of the leader of a company and saw this: “John serves as CEO and Cheer­leader for his busi­ness.” That’s a line that should be in every CEO’s bio.

My book “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes,” is now available as an ebook.

Want to Grow as a Leader? Become This

I was speaking with a friend about our experiences with interviewing and hiring. He once interviewed a woman and asked her what mistakes she had made and what she had learned from them, a fairly common interview question. “I haven’t made a mistake,” she responded.

That would be the end of any interview for me. That woman demonstrated she wasn’t self-aware enough to know what mistakes she had made, much less learned anything from them.

We all have unique strengths and weaknesses, and if you want to grow as a leader, you need a firm grasp on what yours are. The single best way to grow as a leader is to be truly self-aware. As Benjamin Franklin said, “Observe all men: thy self most.”

Self-awarenessOnce you know your own strengths and weaknesses you can leverage and maximize your strengths to the best of your ability. As for your weaknesses, identify the ones you can improve on and take steps to improve those skills. Then hire people who excel in those areas you have identified as weak for you.

I’ve written about the Disney brothers before in Famous Sibling Partnerships That Worked. Walt Disney, the more famous of the two, was the visionary. The creator of Mickey Mouse, the most famous mouse in history. But his vision would never have become a reality without his co-founder, his brother Roy, who was the money guy and the one who made Walt’s visions a reality.

The results of a study done by Green Peak Partners and Cornell’s School of Industrial and Labor Relations in 2010 emphasized the quality of self-awareness and its importance for a leader. The study examined 72 executives at companies with revenues from $50 million to $5 billion.

One of its findings? “Leadership searches give short shrift to ‘self-awareness,’ which should actually be a top criterion.  Interestingly, a high self-awareness score was the strongest predictor of overall success. This is not altogether surprising as executives who are aware of their weaknesses are often better able to hire subordinates who perform well in categories in which the leader lacks acumen. These leaders are also more able to entertain the idea that someone on their team may have an idea that is even better than their own.”

Erika Anderson is a business coach and writer and says when people with low self-awareness want to grow, “it’s like someone who wants to travel to New York and he thinks he’s starting in Philadelphia – but he’s actually in Botswana.  The steps he would take to get to New York, thinking that he’s in Philly, will definitely not work for him (that pesky ocean is going to be a big shock).”

It’s only by being brutally honest with yourself about your own weaknesses that you are able to find people to fill in those gaps to help your company grow. I have an entire section in my book, “How Not to Hire a Guy Like Me” on leveraging the talents of others to your advantage. It’s critical when growing a business, which is why you hear that interview question about strengths and weaknesses so often.

Focuses on our weaknesses may not be fun. Author Aldous Huxley said, “If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion.” But those pleasures of illusion do nothing to help you grow as a leader.

Knowing herself even helped a World No. 1 professional tennis player.  “I think self-awareness is probably the most important thing towards being a champion,” said Billie Jean King.

Coming soon: How leaders can become more self-aware, and how high self-awareness affects team performance