A flood always begins with a single drop of rain

The Denver Post | BUSINESS

By Gary Miller | gmiller@gemstrategymanagement.com | GEM Strategy Management.com

PUBLISHED: July 26, 2020 at 6:00 a. m.

Larry, the owner of a wholesale food company, had not felt good for over a year. He was consistently tired and losing weight. His wife Christi urged him to get a checkup. Last May, Larry was diagnosed with pancreatic cancer and was given four to six months to live.

Unfortunately, he passed away last September. He was survived by Christi and their two sons who were well established in their respective careers. Christi was not involved in the company at all. She was at a loss as to where to begin and what to do next with their wholesale food business. A flood of problems began to emerge.

Mark T. Osler

Gary Miller

She called a meeting of the senior staff as a starter but found that no one had a complete handle on how the business operated. Larry had made all the major decisions. The flood of problems continued.

Revenues were declining and cash was tight. She asked their accounting firm and their personal attorney to help her review the business operations. After several weeks of analysis, both their accountant and their attorney recommended that Christi sell the business. A few months later, a major competitor purchased the business for a fraction of what it was worth.

A year ago, Ben and his partner were managing a successful events planning firm serving major clients throughout the U.S. While the company performed well last year, COVID-19 caused most of their clients to cancel their upcoming events for the year. As a result, most of their revenues disappeared overnight. Ben and his partner laid off over 80% of their staff. But they were still bleeding cash at an alarming rate. And the flood of problems escalated.

In addition to the company problems, Ben’s marriage was on the rocks. He was served divorce papers last November. The divorce was contentious but was finally settled with Ben owing several hundred thousands of dollars to his ex-wife.

Ben had no choice but to try and borrow the money personally — but that failed. So, Ben pleaded with his partner to apply with him for a business loan. His partner refused. He didn’t want to have to personally guarantee a business loan for non-business purposes. With COVID-19 drastically affecting their business, Ben and his partner had to close the company last month. Ben declared bankruptcy this month.

Two years ago, Charlie decided that he was burned out and wanted to retire. He had built a successful marine sales, service and storage business over the past 23 years, but he wanted out. Charlie wanted to spend more time with Lily, his wife, and do some traveling and spend more time with the grandkids.

Last year the business was generating about 23% net income on revenues of $11 million. But last December, he lost both his service manager and sales manger to a major competitor. He was depressed as he began to see that the quality of his service center declining.

More of his customers were returning their boats claiming their mechanical problems weren’t fixed. The service department personnel was not adequately trained resulting in service mistakes.

In addition, sales revenues of new and used boats were declining. After reviewing the sales figures over the past two years, he found that about 65% of the sales were being made by the sales manager — the one that he had just lost. His problems did not end there.

One of his former employees was suing him. Her suit claimed that she had worked in a hostile work environment. With the loss of two key employees, declining revenues, a lawsuit and Charlie being burned out, he had a flood of problems.

In the end, Charlie could not sell his business because no buyer wanted a company with declining revenues, a lawsuit that had not been resolved, and a lack of bench strength in both service and sales departments.

These three examples reflect a number of individual problems (rain drops) that collectively turned into major problems (a flood) that could not be reversed.

In the first example, Larry’s wholesale food business did not have a strategic business plan, a certified valuation, or a succession plan addressing unanticipated events — such as insurmountable health issues. There was no delegation of authority, or a plan for unanticipated problems. The casualty of this flood was his wife Christi.

In the second example, Ben and his partner did not have the business acumen to address unanticipated events — like a divorce and its potential effects on the business. Financially, they had not created enough retained earnings from a profitable business to address Ben’s divorce settlement. Because the company had no certified valuation, there was no way that Ben and his partner could formalize the true value of the company. A formal valuation of the company may have saved Ben a significant amount of money — particularly with the effects of COVID-19.

In the third example, Charlie did not have a business plan or an incentive bonus and an employee retention plan in place (such as phantom stock) or other incentives to reward and retain his two key employees. Further, Charlie had not taken the steps to weed out poor sales performers by hiring more qualified sales personnel and employing higher skilled service personnel.

These three examples demonstrate inadequate management acumen and ineffective business planning. Also, they demonstrate why companies need adequate working capital, retained earnings, up-to-date business plans, succession plans and third-party certified valuation conducted annually.

Remember, a flood always begins with a single drop of rain.

Gary Miller is CEO of GEM Strategy Management Inc., a M&A consulting firm that advises small- and medium-sized businesses throughout the U.S.  Reach Gary at 303.409.7740 or gmiller@gemstrategymanagement.com.