Wow, it has been a while since I’ve written anything here. Things have been busy, to say the least, between my regular job and family. My oldest started high school marching band as a freshman and her schedule is brutal! (Translation: Lots of after-school practice, football games, and marching competitions).
Today we are going to talk about when things don’t go right in a business, from a finance perspective based on a business I am involved in. The names have been changed to protect the innocent.
In March of 2017, a group of former colleagues, with me as a minor investor, purchased a door manufacturing business. At this point, none of us had ever been involved in that industry, but we thought that between the four of us, we could figure everything out and grow the business.
Prior to the purchase, we examined the prior owner’s books and he seemed to be making decent revenue and profit. We tried to analyze Cost of Goods Sold (COGS) and Expenses to get a good handle on what our potential revenue could be.
Because three of us were working full time jobs, the fourth partner, we’ll call him Bob, was going to run the business initially, until we could grow the business enough to hire someone to manage it.
We attempted to get Bob to put together a pro forma operating expense projection, but he kept claiming “he would not be able to accomplish this until he was actually working IN the business and understood everything”. RED FLAG #1 (In hindsight, this should have shut down the deal for us.)
Once we purchased the business, Bob assigned himself a $100,000 per year salary because that was what he “needed” to survive on. We, the other investors, had not begun to understand the business’s key financial benchmarks at this point, so let it slide. RED FLAG #2
After six months or so of this, we begin to realize that our working capital was steadily draining. In addition to Bob arguing against every suggestion the board, (other three investors), would make to improve things, agreeing to implement the suggestions, then never acting on them. We slowly started to realize that even though we all agreed at our initial gathering that this was an investment to grow and either sell it for a profit or, after three years of profit reinvestment, provide cash flow and dividends, Bob was acting as if he was setting up Bob’s Kingdom. He wanted to run the business exactly as the previous owner had run things. RED FLAG #3
We made changes. First, we reduced the salary to $50,000, a figure more in line with the position. Then we removed him as President. We attempted to replace him with a salesman we brought on and moved Bob into the sales role, but since Bob was still involved and also trained the salesman, he was set up to fail. Bob did not teach him everything and did not say anything when things slipped through the cracks until after we noticed a couple of months down the line.
The business continues to limp along. We have not put any more capital into it. Bob occasionally takes out small invoice-secured loans when the bank account gets too low. He is working at another job and has the lead employee mostly running the business.
We other investors have mostly given up on expending more than just a nominal effort to expand the business since no advice given is followed. We came up with plans and strategies on how to streamline the business and improve revenue, and presented them as a means to grow the business, but they didn’t sit well with King Bob, so they went nowhere.
The best I can hope for is that I can harvest some capital gains from other investments when this business eventually fails so I can offset the losses on my taxes.
In a future post, I plan to lay out the lessons learned from this experience and hopefully it will help you, the reader, to avoid some of our mistakes.
Post in the comments about your things that didn’t go right.
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