On the brink Featured

9:49am EDT July 22, 2002

Is your business in financial trouble? You’re not alone.

Henry Ford failed twice before he founded Ford Motor Co. And Ted Turner, vice-chairman of Time Warner Inc. and founder of CNN, nearly went bankrupt four times before he made his $7.8 billion fortune.

Nobody knows how Ford and Turner turned their businesses around so that they would eventually become two of the most successful entrepreneurs of the 20th century. But every business owner should know how to recognize the signs that their business is in trouble and what they can do to save it before it goes belly-up.

Marc Gertz, an attorney with Akron’s Goldman & Rosen LTD, says recognizing the signs that your business is in trouble isn’t rocket science.

Not having enough money to make payroll, to buy inventory, to pay your taxes, bouncing checks,” he says. “Those are pretty good signs that things aren’t going as well as you’d like them to go.”

But why do business owners end up in that position? First, they underestimate what it really takes to make a business successful.

“Restaurants have the highest rate of failure of any business. Yet everybody who can boil an egg feels that they are a restaurateur,” Gertz says. “Everybody believes that they will be the exception and not the rule. That they will be the one who creates a thriving enterprise and lives happily ever after.”

But that fairy-tale ending will elude people who don’t ask themselves the right questions before opening their business and who don’t do the type of planning that tells them that, for example, the donut shop down the street sells its chocolate-covered confections for 50 cents less than they do or that there are already four Dunkin’ Donut shops on the street.

Still, even if you devise a business plan that would impress Alan Greenspan, you might end up in bankruptcy court if you don’t put the right people in place.

“Let’s just say you’re a fabulous marketing person,” says Kathryn Belfance, an attorney with Akron’s Belfance & Belfance, a law firm that specializes in bankruptcy. “You can sell brooms or detergent or anything to anybody. But you can’t stand numbers, and you’re not a particularly good manager.”

If you don’t hire an accountant and a manager, she adds, “You’re not using your real talents, because you’re doing things that you’re really not equipped — or have any ability — to do.”

Still, business owners who’ve raided top people from Fortune 500 companies make crucial errors that bleed money out of the company. It’s at this point — or earlier — when you should call your attorney or accountant to get some help.

“There’s a tendency for people to bury their heads in the sand, not wanting to accept or believe that their business is in real trouble,” Belfance says. “Essentially, what they do is run to get more money without solving the problem. More money is not going to solve the problem. The same problem is going to be there once that money is gone.”

Much like a cancer patient who goes to see a doctor as soon as he or she starts feeling ill, the earlier you contact your accountant or attorney, the better chance you have to survive. Once you trudge in the door, most will do a projection to see if you can turn things around, cut deals with your critical vendors so they will continue to supply you, look for ways to increase profits and look for excess overhead you can cut.

When Akron’s Cotter Merchandise Storage Co. almost closed its doors in 1990, John Seikel, owner of John J. Seikel & Associates accounting firm, brought it back to life through a Chapter 11 bankruptcy, which gives companies time to reorganize so that they can pay off their debts — as opposed to a Chapter 7 bankruptcy, which is a straight liquidation.

“They fell into hard times because they tried to grow too fast,” Seikel says of the $8 million company. “They took a large sum of money [and] started a new company in Texas. It was supposed to make money in 18 months. At the end of 2 1/2 years, it had lost $4 million.

“At the same time, they started a new division here that lost $1 million in its first year,” he continues. “So all these new things took all their cash reserves, and then they started borrowing money at 16, 17, 18 percent just to keep it going.”

And that’s one of the most foolish things you can do.

“That means to make money, you have to make 25 to 30 percent on every sale. You can’t make 15,” Seikel says. Many businesses get trapped in that destructive cycle. But remember, Gertz says, “Sometimes you can keep the life support system going on the body too long and try to resuscitate a business that is just dead.”

Before you borrow another nickel, Belfance suggests you make changes that will help your business come back to life.

“Does this mean you have to lay off some people?” she asks. “Does this mean you have to close an unprofitable portion of your business? Does this mean you have to switch gears and do something that is going to increase revenues? Does this mean you have to move your enterprise to a smaller location? Does this mean you have to sell off the enterprise’s assets to reduce debt?”

Some of those decisions — especially whether you should lay off employees — can be tough. But it’s the CEO who can make those decisions who will survive.

“I’ve seen companies that are clearly overstaffed, spending way too much money on payroll, but they don’t want to put a guy out of work,” Gertz says. “That’s nice that they feel humanistically about their employees. But they’re going to save the pancreas and kill the patient. There won’t be a business at all.”

According to Seikel, one of the “stupidest” decisions business owners can make during troubled times is to pay the “squeaky wheel” before they pay critical vendors that they need to keep their business alive. And while you may feel compelled to hide under the desk when they’re knocking on your door, surprisingly, it’s often in their best interest to help you out.

“We had a company in Akron with five major vendors,” Seikel says. “Instead of going into bankruptcy, we asked them to meet with us, and we were able to negotiate a deal. ... What would have happened if we went into Chapter 11? What would they have gotten? They took a chance, and, in the end, they got all their money, and they kept the customer.”

The most dangerous thing business owners can do when they’re considering hawking their grandfather’s watch just to keep the business going is to put off paying taxes.

“Once you get far behind in terms of paying your taxes, you’re dead,” Gertz says.

Even if you file for personal bankruptcy, those debts will never go away. “They’ll chase you to your estate,” Seikel laughs.

One thing that will go away, however, is the pain that you feel if you end up closing your doors after all. In fact, Belfance says many business owners feel enormous relief once they give their business its last rights.

“Once people accept the fact that they can survive this kind of loss, that they will be OK, that they still have their life, they generally experience enormous relief, because oftentimes, they weren’t equipped to do what they thought they could do,” she says. “The fact of the matter is, not everybody can be an entrepreneur. And that is OK.”

How to reach: Goldman & Rosen Ltd., (330) 376-8336; Belfance & Belfance, (330) 535-0505; John J. Seikel & Associates, (330) 867-4733