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Capital Ideas
Opinion and commentary on financing and nurturing the growth of entrepreneurial enterprises in the innovation economy.

Dennis Gerschick

Advising a Troubled Company©

by Dennis Gerschick
President, VenCap Advisory Group, Inc.
and General Partner, VenCap Opportunities Fund, L.P
Kennesaw, GA


Many companies, large and small, are in trouble or are heading for it fast.  One only has to read the headlines to learn of multi-billion dollar write-offs and new bankruptcy filings.  Economists may debate whether we are currently in a recession or not, but virtually all agree – economic conditions in early 2008 are a big concern.

Over the years, I’ve spoken with many bankruptcy lawyers and turnaround experts.  Their number one complaint is that their clients waited too long to contact them.  They would have been able to help even more if they had been contacted sooner.  Why do clients wait?  For a number of reasons.  Men, in particular, are known for not going immediately to their doctor.  Many assume or hope the problem will go away.  Others think they can diagnose the problem and fix it themselves.  Business owners and executives are the same.  To seek help or advice is to admit there is a problem.  Many think this will reflect poorly on them.  Egos get in the way – they don’t need help, they’re smart and know what they are doing, etc.

Most people understand that the first step in solving a problem is to acknowledge there is a problem.  Unfortunately, to get people to acknowledge problems is a major obstacle.  I speak throughout the country to CPAs.  Many CPAs do not advise their business clients that their business is getting into trouble or that the trends do not look good.  Why?  Because many CPAs are afraid their clients will shoot the messenger – fire them.  If the business owner or executive won’t acknowledge the problems and the company’s CPA won’t discuss the problems, who will?  This is a major problem, especially for closely-held companies who are not monitored by sophisticated directors, shareholders, analysts, or bond rating companies.

Lawyers could play a constructive role.  However, many don’t for three reasons.  One, many lawyers do not have a strong business background and do not think of themselves as business advisors.  Instead, they only focus on the legal issues they have been asked to address.  Two, like CPAs, they are afraid of offending their client and losing business.  Three, many lawyers do not receive their client’s financial statements and cannot see the trends in the numbers.  What is the answer?  I tell clients I am there to help them succeed.  Not just because I’m a nice guy, but because successful clients can pay my invoice!  Also, successful clients tend to need more services!  They get involved in more deals and one thing leads to another.  I’m a big believer in the idea that asking the right question is 90% of the solution.  In law school, lawyers are trained to “spot the issue.”

The same should be true for business.  Unfortunately, many business people do not spot the issue because they don’t even stop to think about it.  I’ve had many people tell me they don’t have time to think about their business because they are too busy putting out fires.  I respond that they would not have so many fires to put out if they would execute a well thought-out plan.  “Plan your work and work your plan.”  Sounds simple doesn’t it?  Unfortunately, many businesses do not have a plan; they are simply reacting to the day’s events.  The advantages of having a business plan will be explored in another article.

How can you help your business clients?  Encourage them to get a “check-up.”  People go to doctors for medical check-ups, even when they are feeling well.  Similarly business owners or executives should get a “business check-up.”  Preventative medicine strives to prevent larger problems from occurring in the future.  Preventative maintenance on a car has the same goal.  Let a competent individual get under the hood, poke around, and ask questions.  The same concept applies to businesses.  They may see things the owner or executive will never see or can better diagnose the problem based upon the symptoms that are present.  A fresh perspective is often invaluable.  An outsider can challenge conventional thinking, bring their own experience and knowledge learned from working with other companies, and apply it for the benefit of your client’s business.  A “business check-up” is often not that expensive and the benefits often far exceed the cost.

Time really is of the essence here because perception is reality.  When customers and/or suppliers get the feeling that a business is in trouble they often do not want to do business with that business.  Suppliers may be concerned that they will not get paid, so they supply only on a COD basis.  In short, perception may create a self-fulfilling prophecy.  Problems need to be nipped in the bud, when the company’s options are the greatest.  As a problem grows, the options for dealing with it often tend to narrow.  Executives wait and watch and then they claim they have to file a bankruptcy petition to stop creditors in their tracks.  It has been reported that only 12% of companies that file a Chapter 11 petition actually emerge and go on to success.  In short, if a company files a bankruptcy petition, the end is in sight the majority of the time.  The goal is to never get there.

Summary of Key Points

1.         Many owners and executives do not like to acknowledge that their business is in trouble.

2.         CPAs and lawyers often do not alert their clients to current or coming trouble.

3.         Having an independent third party do a “business check-up” can provide many benefits.

4.         It is critical to spot and fix the problems as quickly as possible, before they grow into major problems.

Dennis Gerschick is the President of Gerschick Business & Investment Counsel, LLC and can be reached at dennis@gerschick.com  Dennis would appreciate your suggestions for future articles.

© 2008  Dennis J. Gerschick  All Rights Reserved


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Replies and rejoinders:
Dan Loague

Well thought out and informative!

R. Dan Loague
Capital Formation Institute
Amherst , NY 14228

BIO
http://www.cfi-institute.org


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