A Number of years ago, a group of us were on a sailboat trip in Southern California. The weather had been good and we had spent the weekend at Catalina Island.
On the way home, across 26 miles of open ocean, a dense fog had come in. All of the boats in our small group had sufficient navigation equipment to find our way in the fog, so, with no wind; we were just motoring our way home.
Suddenly, out of the fog came a small boat with two adults and two children. They hailed us with a panicked cry: “What is the way to Marina Del Rey?”
We took a compass bearing and gave them a course. They thanked us and disappeared into the fog. A few minutes later we heard them asking another boat in our group the same question. And then another. Finally, we could no longer hear them.
And that’s what panic sounds like.
We recently became involved …
We recently became involved with a company that has been in the construction business since the 1950’s as a large subcontractor. A family business that has been successful doing large commercial projects, they recently experienced a number of setbacks: Several of their bids were significantly underbid and they were unable to make sufficient margin.
In one case, their crew misread the job instructions and they had to undo a large amount of work that had been performed.
And due to a more than doubling the size of the company in one year, they installed a new computer system that screwed up their job costing and accounting.
And while all of this was happening, their bank line of credit was far too small to support the growth of the company.
So They Financed By Using …
So they financed the company the way that they knew how; out of payables. And as payables to subcontractors became stretched, they added federal and state payroll taxes to the list of things that didn’t get paid in a timely manner.
Finally, as construction liens threatened the large commercial projects, the general contractors began pay with joint checks, insuring that anyone who might lien a project was paid in a timely manner, but significantly reducing the company’s ability to control and manage their cash flow. 
At the same time, both the state and IRS were escalating collection efforts, reaching the point of seizure notices from both entities.
This, the result of a payment plan they had negotiated on their own, but due to not understanding their cash flow, had been unable to meet.
They Asked Everyone They Knew …
How did the company react while all of this was happening? They asked everyone they knew: What should we do?
And since they asked people with vastly different frames of reference, they received vastly different answers.
An accounting firm told them that they could get them an SBA loan. This for a company where debt exceeded assets by over $1 million.
After some time went by, the accounting firm told them they couldn’t help them. Someone else told them that they really needed a tax lawyer. But they felt they couldn’t afford one, even though the officers of the company are personally liable for trust taxes and cannot discharge this liability, even in bankruptcy.
You Should Be Able To …
And finally, another “friend” who the CEO of the company considers a mentor, told them that they really didn’t need help, they should be able to handle this themselves.
Eventually, a group that they approached for a loan told them that they could not get a loan without a detailed financial plan and referred them to Revitalization Partners. After six weeks of delay, they retained RP to help them get a loan.
With Accurate Financial Information …
After a quick review of their current financial situation, we told them that getting a loan that would be sufficient to pay off past liabilities would not be possible, due to the level of current cash flow, level of debt, and the potential IRS and state actions. However, we did believe that given the now accurate financial information we might be able to negotiate a workout plan.
Clearly this company was not prepared for the growth they experienced. And because of a lack of preparation for both increased management and financial needs, as the business got larger, the problems got larger as well. The problems got larger and so did the panic about what was happening.
After a lot of internal discussion and talking with one of their largest customers, the company has decided to work with RP to develop and execute a plan that will provide for both current operations and begin working down the past debt.
While nothing is certain, a positive definable action should provide reassurance to customers, creditors and taxing authorities that the company is serious about meeting its obligations and continuing its business as well as demonstrating viable management practices.
And that’s a lot better than panic.
