Your Employees Always Know

Have you ever thought to yourself, my employees have no idea what I make, or they have no idea what our profit is on this or something similar? Well let me tell you something: you’re wrong.

There are no secrets in a company. Your employees know.

I once took over at a refrigerator warehouse company and began my job by dramatically slashing the owner’s salary, which was not simply too high for the owner of a failing company in need of a turnaround professional but too high for the owner of any company this size. Oh, and I also fired his grandmother whose salary was also a pretty penny too high.

Later that same afternoon I was surveying the warehouse which was a mile away from the offices and headquarters, and a forklift driver pulls up alongside me. He says, congratulations on firing grandma and reducing the boss’s salary – he should never have been making so much money.

Not only did this random employee already know that I’d done both of these things, but he knew that grandma was on the payroll and the boss was making way too much beforehand.

I’m telling you – your employees always know. There are no secrets.

That leads me to a few pieces of advice:

1. Ensure that all of your employees sign a non-compete/non-disclosure confidentiality agreement. All of them, no matter their position.

2. If you have things that truly must be kept secret, think longer and harder about who has access to that information, what computer(s) it resides on, etc. Despite the fact that everyone is working on or around it, I’m sure that the secret formula for Coca Cola is still secret.

3. Accept that certain information will be public, and use the knowledge of its publicity to your advantage.

What have you been surprised to learn that your employees know?

De Nile – A River in Egypt or a CEO’s Final Resting Place?

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our newest Partner, Vic Taglia.

In my post a few weeks ago about how to treat your bankers, creditors and vendors, I advocated telling the truth. As important as it is to tell all of these people the truth, it is even more important to tell yourself the truth.

I recently came across a company whose bankers have expressed some discomfort in their situation (no names here obviously). The loan balance has declined, and the bank wants to continue to reduce its exposure. In recent memory, the company has not satisfied its debt service coverage covenants, but the loan document has been extended on a short term basis. Since the principal owner describes his industry as “declining” the only growth will be through consolidation. Moreover, the company has exhausted its balance sheet reserves, even to the extent of taking some tax positions that will improve its book equity, but cost it millions of dollars in CASH over the next several years.

See the warning signs?

  1. Declining industry
  2. Nervous bank
  3. Bad operating performance
  4. No focus on Cash, which we all know is king

The principal owner/CEO stated that he had made some significant spending cuts, and that this year will be better than last. His projections show a slight decline in revenue with increasing EBITDA, but still not enough to cover its interest expense.

When I looked through the financial statements I noticed that payroll in some operating areas had indeed fallen by about the amount revenues had fallen, but payroll in the sales and executive departments had increased. I also noticed a monthly payment for a luxury sports car’s financing company that matched the make in the CEO’s reserved parking spot. The CEO said he had a new, more expensive model on order for summer delivery. The CEO said everything was fine; he had his business under control, and he had a wonderful, long-term relationship with his lender, even though his new loan officer needed some more time to understand his business.

I contend that the CEO is in denial about the true state of his business. As my favorite coffee mug is fond of saying, “De Nile is Not Just a River in Egypt.”

Without significant changes in his mindset and the business’s operations, the bank will continue to ratchet down its exposure. There will be fewer operating accommodations, more reporting requirements, more onerous covenants and certainly no financing for acquisitions. He will be the acquiree, not the acquirer. It’s quite likely that he will find himself out of the business and out of a job within 18 months.

While it is important to maintain a positive attitude for your family, employees, vendors and creditors – after all, hope is extremely important – it is also important to face your reality, especially when the chips are down.

You can talk to your trusted advisors — lawyer, accountant, even a banker — to share your concerns and fears and more importantly to chart a course of action to rehabilitate your business. But when your advisors can’t help, call us, and face the harsh reality rather than board De Nial River Boat Cruise to self-destruction.