Going Out of Business: 5 Lessons Learned the Hard Way
An entrepreneur shares the 5 most important lessons he learned while undergoing through the traumatic experience of closing down his business.
My friend Richard just closed his business. He’s a smart person, creative, ethical and hard-working. It was a big blow, but he’s a positive person and now he’s back at it. I asked him to share what he learned from the experience and I found his response so encouraging I wanted to share it:
“Having closed a thirty-year old commercial plumbing contracting business that I bought from its founders in 1999, I share these lessons learned for the benefit of my fellow serial entrepreneurs.
#1. Be Careful When Choosing Partners
After previously doing two large, successful projects in partnership with another specialty trade contractor, I learned the hard way that who you select as partners matters. Really matters, as in life and death matters.
When the senior executive with whom I had done the other projects left the firm, I had no reason to think that things wouldn’t continue in the same positive manner. Unfortunately, that wasn’t the case. Not only did the new executives take $8 million of my scope of work after we secured a big hospital deal together, I ultimately had to file a lien and lawsuit for damages approximating $1 million.
#2. Don’t Wait to Deal With Problems
When my partner company started shorting my monthly draws by $30,000 to $40,000 towards the end of the project, I should have reduced payments to my vendors in kind. We had always prided ourselves on paying subcontractors and suppliers in a timely manner, and as an optimist, I felt sure that we could work out these issues as we had always done.
Cash is king, and working capital matters. Greatly. In my case, more than any other single metric.
Had we done what I just suggested above, liens would have been filed by those downstream from us, (the little guys have much less flexibility about payments), and our dispute with this larger “partner” would have surfaced to the CEO of the hospital immediately. He would have directed the general contractor to get this handled. By waiting until the project was complete, the $1 million of lost working capital was my problem and mine alone.
#3. Avoid Personal Guarantees
Stress can make good businessmen and women do things they wouldn’t do under normal circumstances. When we ran out of working capital in December, I went to our three of my big current clients and asked them to fund our activities based on projections that indicated that we would generate positive cash flow in 90 days. As the amounts forwarded by the general contractors mounted, they began to get nervous and two of them had me sign documents that transferred liability from the company to me personally.
Since my intent was to pay them back, and since I had no reason to not have confidence in the projections, I gladly complied. In fact, I actually suggested to the second contractor that we use a document created by the first contractor. All without the normal review of our attorneys. I’m told by lawyers that this happens all the time…people sign documents they shouldn’t.
Lesson learned: Never personally obligate yourself when your company, which you established to protect your family, should be the sole and appropriate obligor–especially when the chips are down. There was no reason for me to sign those documents and under normal circumstances, I would not have even considered entering into a formal financial arrangement without appropriate legal review.
#4. Closing a Business Makes You Better
When a company closes, and this was my first, there are all kinds of pressures. Family. Financial. Social. Psychological. For four months, I felt like I was eating stress morning, noon and night. And pretty amazed that I was able to stand up under the weight of all that to knock down one obstacle after another.
Having gone through that experience, I feel like I unintentionally earned an MBA that makes me a much better businessperson. The old adage, what won’t kill you makes you stronger was never truer in my case. Students can read case studies all day long, but until you have had to terminate fifty-five employees whose families depended on you to make sound decisions, you haven’t really learned what closure is all about.
The lesson? While I wouldn’t have scripted things this way, closing a business equips its leaders with unique experiential knowledge that should translate into making them much better leaders in the future. I have a friend who has three peers in a national philanthropic entity, all of whom are billionaires. Their secret? Bankruptcy was the seminal event that taught them things to avoid in a way that left an indelible imprint on their business DNA forever.
#5. Faith, Family and Friends Will Get You Through
And finally, closing a business seems like the end of the world to its founder. The truth is that it can be the catalyst for new horizons that the businessperson never dreamed of. In the month of June, I have interviewed with 44 executives! In that period, two interim consulting engagements have emerged and at least a half dozen permanent opportunities have presented themselves. Since I haven’t interviewed since 1983, you can imagine the thoughts that went through my mind at the outset. Will I get a job? Do I still have what it takes to lead?
The most important lesson I have learned through all of this? God is in control and as bleak as things sometimes got, the sun will come up tomorrow. Owners and leaders of closed enterprises should cling to this promise one of my favorite quotes from scripture and know that it is true for their lives too:
For I know the plans I have for you,” declares the Lord, “plans to prosper you and not to harm you, plans to give you hope and a future.”
These are great lessons for everyone from my friend Richard.