Don’t Do What I Did #003: Created our Private Hell by ignoring the balance sheet.

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Given that I had a “growth at all costs” mindset at 23 years old with my thirty seconds of business experience and virtually no scar tissue, it stands to reason that the only thing I cared about was growing the top line and assuming that the bottom line would take care of itself.  While that has validity…it is the balance sheet that determines whether or not your company will ever get to the point where the bottom line is taking care of itself.  This is a trap that many entrepreneurs fall into…and I even took accounting and finance at John Carroll University!  Go JCU!!  While our income statement at Caiazza Candy may have shown profitability (which was rare), the balance sheet showed many warning signs.  What were some of the signs I would have seen if I weren’t ignoring the balance sheet you ask?

  • That my bills were coming due before my cash was going to come in (negative current ratio) and that I would fall behind paying suppliers.
  • That my inventory was growing as a result of the fast growth which was putting my cash on ice until I could convert the inventory to receivables and then to cash.
  • That my leverage was getting so high I would not hit bank covenants, even with positive EBITDA.
  • That I was funding losses by borrowing on my line of credit which meant that I would not be able to pay my line off as required in my loan agreement, not only because of the losses, but because the value of the underlying A/R and inventory was less than the line balance.

At the end of the day, in addition to my actions, our lousy balance sheet was what was driving us out of business whereas a strong balance sheet would have allowed us to survive the “Idiot Curve”.

Takeaway: Profitability is obviously crucial. But no matter how profitable you are, you need cash to survive and grow or to survive until you turn the corner.  A profitable company can go into bankruptcy if it doesn’t have cash. Allowing your balance sheet to become illiquid and heavily leveraged because you are not paying attention to it may have the consequence of putting your company out of business, but between now and then, while you are trying to fix things, it may have one of those wonderful consequences called an “Unintended Consequence” that will put you and your team in your own private hell at the time you can least afford to go there….we’ll explore that one soon.

HTF Lesson #003: Hire the Wrong People

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Hiring and retaining great talent has always been difficult for those who are striving to build a profitable and enduring business. However, as evidenced by the way you run your business, you want to fail. So how can you ensure that you hire the wrong people to help you achieve your goal?  While one may think that is easy to do…just hire somebody woefully under qualified for every position and just like that you will fail!  But wait…would you rather be a flash in the pan failure or would you rather fail in an epic manner?  If you are looking for a quick way to fail, don’t waste your time reading my blog.  My blog is for those who want to go big or go home, my blog is for those who want to f$!k up big-time.

So, hire people who are qualified. But while interviewing, make sure you both develop a quick connection with one another.  Let that person sell you on why they should hire you.  After all, lesson #1 was “Sell, sell, sell” so you need good sales people in every functional department even if they are not directly selling.  Additionally, hiring people that you are able to personally connect with is a great way to surround yourself with people who worship the ground you walk on, because after all, as a leader it is important to be liked.  If you are not liked no one will be willing to put up with your micro-managing, no one will crave your attention and above all, you won’t have people around to validate your ideas, strategies & objectives.   In other words, you won’t be able to surround yourself with people who tell you what you want to hear.

Because some people are really good interviewers they may be able to fool you into thinking they like you (which is probably easy in the first place) so I have used a great question towards the end of the interview that really puts them on the spot.  At the end of the interview, after I have stopped talking about myself and my company, I ask, “So…enough about me, now why don’t you tell me about me.”  If they can get through that question without stumbling, you’ve got yourself a winner.

Takeaway: Just as important as hiring a qualified person is hiring someone with whom you have formed a connection because that connection will ensure loyalty which is critical when it becomes apparent to your employees that you are taking the company down because if they leave, you won’t have anyone to blame.

HTF Lesson #002: Stand for Nothing

This one is pretty straight forward. If you stand for nothing, it will allow you to stay flexible which is incredibly important to accomplishing #001 Sell, sell, sell. What do I mean by “Stand for Nothing”? It can be interpreted as “Be all things to all people”. That way, you are always sure to keep everybody happy, which as you know, is really important to creating a great culture. It also means not developing any values by which your company operates. Values are tough to uphold when you are growing fast and can change at any time depending on the situation. Values also keep you confined to certain lanes, which means you will never get to move into the passing lane.

Values also get in the way of maximizing failure because if you abide by them it can lead to a solidly profitable company. Who would want that when the excitement is in failing, after all, who doesn’t love a good train wreck? There are many examples in business and politics where having values that you live and operate by lead to success but remember, your goal is to fail.

Takeaway: Culture, values and purpose (the latest buzzword) will impede on your ability to fail…avoid them at all costs.

Don’t Do What I Did #002

Ego. When we bought Caiazza Candy, I can say with the benefit of hindsight that “Ego” was one of my values along with things like Image, and Growth.  As opposed to almost thirty years later when the are: Integrity, Hustle, Authenticity, Transparency, and Resilience.  Ego was the value that led me to many mistakes such as:

  • Never listening to anyone, AKA, knowing it all at the ripe old age of 23 when I really didn’t know shit.
  • Not taking things slow, I needed to build fast to show everyone how “successful” I was.
  • Not valuing my sister as a 50% partner, which, along with not being transparent with my wife about the business struggles, caused years of family troubles and ultimately, years of pain after we shut down.  While it is important to forgive yourself…I am still having a hard time with this one.
  • Not knowing when enough is enough.

That last one is what gets many entrepreneurs in big personal trouble because they start “throwing good money after bad money”.  They will empty their savings, pledge their home, etc to allow them to continue to make the same mistakes instead of either taking an honest look at what got them there in the first place and course correcting or just dealing with the reality that the business is going down and throwing in the towel.  Ego made me make decisions based on what was best for me, not what was best for the company.

Looking back, I can probably pin most of my mistakes and business failures on Ego and Growth as values as opposed to the types of values that would have kept me centered and focused on building something special and enduring.  If only I knew then, what I know now.

Takeaway: You are not the smartest person in the room and if you think you are, then as Loren Michaels said “…. its time to get a new room.”

HTF Lesson #1: Sell, sell, sell

Let’s face it, nothing happens until something is sold.  Therefore it is really important to make sure that you never stop trying to drive the top line.  One of my first mentors told me “Get the order first, then worry about how you are going to make it”. At another time, I asked him when his business really started to take off.  His answer was “When the bank called me to tell me they were foreclosing”.  Obviously, he knew what he was talking about and never stopped selling no matter how little gross profit he made, no matter how short his production runs became and no matter how tight his cash flow became.  The point was that the top line was growing so eventually the bottom line would take care of itself.  You are always one big customer away from breaking thru and until that time comes, at least make sure that prices contribute to overhead.

Selling to drive the top line will also help with your concentration risk (having too many eggs in one basket) because it will ensure that you have a revolving door of customers and lots of them.  You will require a large customer service department and they will get great training making lame excuses to small, pain in the ass customers so that when they have to deal with a big one, they will sound confident.

Production will love it too because they will get to push the boundaries of what can be done since you will be taking in business that is increasingly outside your company’s core competencies.  Employees will love the OT.

The only parties that will be concerned with your strategy are other stakeholders such as investors or lenders.  However, since you obviously are good at selling, you will be able to handle them on your way to being very profitable. So don’t worry about it, just keep selling.

Don’t Do What I Did #001

Notice that I left room for 999 entries regarding my failures/mistakes in business. A big part of this blog is going to be about my own business failures. I think it is important to “own” things and to write about failure without writing about my own is disingenuous. So as I mentioned in one of my first posts, part of this blog will be about my own failures, part will be case studies of the business failures of others and part will be a “How To” guide to failure in the event that any of my readers would prefer to fail and live with the misery that ensues.

In the 1930s my Uncle Ludwig, A.K.A., Pup, took over the family candy company that his brother started. Pup was a mechanic by trade turned candy maker. Many of the family children worked there after school instead of playing outside with their friends and were not paid until after the holiday when Pup would hand out dollar bills to them over dinner. It was called Caiazza Candy and he made candy in the basement of an old mansion that he then sold to retailers around town. In 1960, he sold the company to a customer and our family always wished that he had never done so. I can still remember eating chocolate easter bunnies that he made.

In 1989 the family he sold it to wanted to sell it back to us. I can still remember my father calling to tell me about it and the feeling of excitement I had about potentially being able to carry on my family’s name in the candy business and take it to new heights.

My sister and I bought the company in 1990 at the ripe old ages of 23 and 21 respectively with VC backing from our father. I remember thinking early on that no one should be given the keys to a business at 23 years old. That was a fleeting feeling because we were going to build that company into a national brand and go from a 2,400 sf plant to one the size of a Russel Stover facility. My sister was running our two stores and I ran our plant and wholesale. From 1990 until 2004 when a fire destroyed our 10,000 sf plant, we were able to go from selling local drug stores to selling the likes of Starbucks and Nordstrom. What an amazing accomplishment. Although we were great at developing product and selling it, I, as the president had no idea how to make money and figured more sales would eventually put us in the black. Even if we did not have the fire, we would have gone out of business anyway.

Takeaway: Looking back, the seeds of that failure were planted in the very beginning because we (I) wanted to grow fast, and be a big shot businessman instead of committing to spend the first five years just running the business and strengthening our balance sheet. Of course, at that age, I had no use for a balance sheet, just the top line of the income statement. It is a common trap that many entrepreneurs fall into: growth for growth’s sake. That ends up creating a business with an insatiable appetite for cash. Would we have succeeded if we had taken those five years to strengthen our balance sheet? Not based on all of the other mistakes I made over the years which we will explore, but we certainly would have had a balance sheet that allowed me to learn from those mistakes instead of react to them.

Takeaway: Come out of the gate fast and hard with no plan other than to get big and be the best. Chances are, you won’t make it.

My First Blog Post

Chances are, you will fail.

The greatest glory in living lies not in never falling, but in rising every time we fall.

Ralph Waldo Emerson

For years I have wanted to write about failure. That is probably because I have never hit a home run and in the process have logged some major failures. In fact, the three major milestones in my career all wound up as failures…or did they? I have spent the last thirty years trying to get myself on the cover of Fortune and during that time learned a lot about failure and myself. I have had two failed businesses and after the second, landed on my feet as a turnaround CEO of a $70 million business and while I was successful turning it around, I ultimately got fired. In between all of this, I spent seven years in the turnaround business beginning in 2008, yes, that 2008. I have failed, watched failure and prevented many failures.

The SBA estimates that 30% of businesses fail in the first two years, 50% fail in the first five years and a whopping 66% in the first ten years. While this tells us that the longer you are in business, the more difficult it is to survive, it also demonstrates that as time goes on, failures rise as a result of poor decisions that build on one another until there is no way to turn it around.

There is an entire industry built on success and self improvement, but I am here to tell you that success is not about what you do right, its about hitting singles and avoiding the wrong decisions.

You can amass a library of “how to” books on success but failure is just around the corner if you are not careful.

This blog will explore failure. My failures, the failures of other business people and what you need to do to increase the chances of failure for yourself and your company. Yes, I am going to tell you how to fail.

My hope for this blog is that by learning from me and others and by understanding the things that lead to failure, you will succeed and build a business that can endure anything.