Hitting the wall Featured

9:52am EDT July 22, 2002

Business couldn’t have been better for C.T. Industries Inc. It was 1997, and the ink was barely dry on a deal President Charles “Bud” Tetzlaff had signed with a new customer that would triple the company’s sales.

In preparation, the 67-year-old job plating, finishing and custom manufacturing company ordered more than $500,000 in new equipment and hired 30 new employees, effectively doubling its staff. Less than a year later, however, the unthinkable happened.

“It became apparent that this big order was going to dry up,” explains Tetzlaff. “It was literally an overnight thing. We had debt issues to deal with because we had added significant capital expenditure. It certainly was in that mode of crisis.”

Tetzlaff’s first instinct was to rush to his bank and quickly negotiate new terms that would allow C.T. to spread out its debt. But when he got there, he found no familiar faces.

“My bank got bought out,” he says. “So now you’ve got different players involved. There was a period of time for about four months, almost five months, when I never heard from my bank. (We) didn’t have an account officer. The officer that we had before the transition from one bank to the other left. It was just a nightmare.”

As though that weren’t enough, Tetzlaff was mired in the laborious task of interviewing for a new CPA firm. Recalls Tetzlaff, “It was hitting the wall.”

Tetzlaff’s wall is something every business owner eventually faces. The wall comes in different forms and sizes, and often much earlier in a company’s lifespan. But make no mistake, it will come. If you haven’t confronted your wall yet, it might be because you’ve been too busy looking back at your business. So turn around. That shadow creeping toward you could be the first portent of the difficult choices you’ll be forced to make.

Simply put, the wall is that moment when a business’s needs outstrip its means. Those needs can be measured using different benchmarks, including finances, personnel, equipment and management.

Surviving the wall requires a delicate balancing act. It’s hiring people before you need them full-time, or before you can justify paying them based on how much work you have available. It’s buying new equipment before you have enough orders to fill your company’s current capacity. And it’s surviving the crushing loss of a customer or a key manager.

SBN spoke with three business owners, all of whose companies are at different stages in their life cycles. Each has faced at least one wall and lived to tell about it. Theirs are stories of confusion, fear, realization, struggle, and ultimately, survival.

I don’t think the wall suddenly smacks you in the face,” says Stanton Cort, an associate professor and head of the marketing division at Case Western Reserve University’s Weatherhead School of Management. “You can be unwilling to cross the wall. You can come up to the wall and stand there and stare out at it. And then something may make you confront it. When you go over the wall, or through the wall, it can be either a matter of choice or a matter of dictate.”

There are other choices as well, Cort says, such as ignoring the wall. But those, too, have their problems.

“If you don’t go through the wall and continue growing, you may still be able to operate profitably, but you probably become a weaker and weaker force in your industry and in your market. So it can be a very, very long process before the company goes away.”

That’s the situation which faces Eventworks Inc.

Up against the wall

“We have faced the wall right from the beginning,” says Joel Solloway, president of Eventworks Inc., an event planning company which has done work for the White House and the Pro Football Hall of Fame. “Cash flow was always a very serious dilemma. We had, and continue to have, a tremendous amount of obligations.”

Eventworks’ origins were so precarious that when it finally moved into an office in the trendy Caxton Building near Jacobs Field in 1997, the building’s other tenants took bets on how long the company would last. Solloway, with the help of his accountant, secured a $50,000 loan from the Small Business Administration to help pay for the move.

“If there’s anything I look back at, it is that we may have actually started out too small,” admits Solloway. “When we got in here, business was pretty good. I ended up paying for a lot of our expansion into this office space out of my own pocket. It really depleted a lot of (our) cash flow. That made things interesting for awhile because we’d be going day to day until we started to fill up.”

The fine art of bootstrapping, however, wasn’t new to Solloway — he founded Eventworks in 1994 out of a spare bedroom in his home. Nor was the timing of Solloway’s tightening cash flow. It came at a time when young companies traditionally face that first wall, explains Michael D. McManus, president of McManus, Dosen & Co. CPAs.

“Every successful business hits the wall,” McManus says. “They typically hit it somewhere between years three and five. At that point, a decision has to be made by the owner. Either he or she does not grow, and ends up turning away business, which is always very difficult for someone to do when for the first three to five years they’ve been taking anything they can get. Or, they look for additional funds. Basically, what happens is you get to the point where you’ve got to bring in excess capacity, people-wise or equipment-wise, before the work hits.”

That’s a problem Solloway today faces. Eventworks has nearly stretched its capacity to the limit.

“The biggest thing has always been that I can only take on so many jobs,” Solloway says. “When you maximize your service, you have to say, ‘No.’ We’ve been trying desperately not to say no. But we’re very, very close to being maxed out.”

According to Robert D. Hisrich, a professor and A. Malachi Mixon III Chair in Entrepreneurial Studies at the Weatherhead School of Management at Case Western Reserve University, this is one of the most critical times for a business.

“This decision is, ‘Do I grow, and how am I going to do that?’” he says. “Then it’s a matter of, ‘Do I give up some of my own responsibility, and do I start hiring people?’”

The decision to hire is crucial, Hisrich says, and an area where a lot of entrepreneurs have a difficult time. The owner of a growing company senses it’s time to hire to prepare for an expected increase in demand. But, because the work isn’t yet needed, those new employees don’t pay for themselves. That’s tricky, explains Hisrich. “You need them. Otherwise, if you don’t get them at that time, you’re really hurting yourself and you may not be able to grow.”

There is also a short window of opportunity. If you try to leap through it too soon, you may stretch your company’s financial resources dangerously thin. But, if you hesitate too long, the window slams shut. “Timing is a critical issue,” says Hisrich. “Particularly in areas such as marketing and finance.”

In Solloway’s situation, he started hiring new people and can free-lance event producers on an as-needed basis. He has also taken on new debt since his initial SBA loan. Eventworks has begun to scale the wall. But whether the company’s made it to the top is a question not yet answered. Says Solloway, “In another year that question may hold more meaning. I’ll know if we really have made the leap.”

Making the tough choices

Michael McManus and his partner, Michael Dosen, once stood in Solloway’s shoes. They were able to successfully j ump a similar hurdle.

“We hit the wall probably at the four-to-five year point,” McManus explains. “For us, that wall was one where my partner and I could not handle everything that needed (our) level of expertise. We had him, me, and maybe three or four people on staff. So we decided that we had to go out and spend some serious dollars to bring in someone with seven to 10 years of experience that we could say, ‘OK, here’s some of (my clients), here’s some of my partner’s. This is (now) our client base.’”

McManus admits he was concerned that his existing client base wasn’t getting the attention it deserved. That made finding new clients nearly impossible.

“What we realized,” he says, “and we realized this after the fact, is that before we had that person in-house, we’d get a lead on something and it would take us a while to follow up on it. (It) was almost because we were afraid it was going to pan out. But you didn’t want to say, ‘No.’”

Their answer was to hire an experienced accountant before building a full work load to support the extra salary. McManus and Dosen took pay cuts to accommodate him.

“We needed to free up our time to handle the additional business that kept coming in,” McManus says. “The day that person walked in the door, we probably only had 20 hours worth of work a week for them. It didn’t take long to fill up their plate. Within three months, we had (him) pretty filled up.”

Seeing a need, then dealing with it is a key issue owners of young businesses must overcome, Hisrich says. Cort puts it more bluntly: “People say, ‘I’m not a very good delegator.’ Well, it doesn’t necessarily mean you’re not a good delegator; it may mean you’re a control freak. That limits growth — if you can’t abstract the business.”

Ironically, McManus & Dosen must deal with a similar situation once again. As the firm continues to grow, the pair faces the need to bring in another veteran. This time, however, the decision is less difficult.

“We’re sort of facing a second wall right now,” McManus says.

Slamming into the wall

According to Cort, the wall can be internal or external to the entrepreneur.

“The internal pieces are the entrepreneur’s capability to manage a larger organization. What is it that makes some entrepreneurs able to get through the wall and other ones unable to get through the wall? It is inside their heads.”

That is the type of wall McManus and Dosen have scrambled over, and Solloway has yet to master.

“The external part of the wall is the need for resources to grow at a rate rapid enough to maintain position in a market that may be growing very quickly,” he says. “That means money. Funding, capital for fixed assests, and also working capital. It means access to facilities. And it means access to skilled production labor and management labor for the entrepreneurial activity.”

This is the more traditional wall all companies face, and the one that nearly put C.T. Industries under.

The problems facing C.T. Industries were more unique. Started in the midst of the Great Depression, it’s a company that knows the value of good management and good customers. Bud Tetzlaff had a good customer, one that was the better part of its business. The problem was, that customer’s order lasted less than a year — long enough for C.T. to purchase new equipment and increase its staff, but not long enough to reap any substantial rewards.

The company had geared up to triple its business, only to be blindsided. The loss of business nearly put it under, but an advisory board member pointed Tetzlaff to a consultant who helped steer the company back on course.