""I told them how much money we had, how much money we could expect, and how I planned to spend it. I put on a brave show, but inside I was terrified."
Paul Downs wrote those words to describe what it was like the day after laying-off 13 of his 23 employees. He was in agony worrying about the people he'd just let go, the people that still counted on him for their jobs, and his own family. If you've never owned a business, it's difficult to appreciate just how much of your identify is wrapped up in the business you're trying to build. In Paul's case, if he couldn't turn things around, that was it. Twenty-two years of his life wasted. He'd be a failure.
The Back Story
As many of you know, I enjoy politics and a good debate. A few weeks ago, I had a discussion with someone at a very good college here in Georgia about capitalism and business. When were done, I found myself more frustrated than I have ever been. The man to whom I'd been speaking views business people as evil. I mean that. Evil. He holds the identity politics world view that I abhor and he believes business owners are "exploiting" (and yes, he actually used that word) their employees.
You see, most of the clients of this firm are business owners or key people and, as you can imagine, that conversation has me worried about how some members of our society are thinking. Because of that, I want to tell you the story of a real-life business owner. While our main character lives in Bridgeport, PA, you could generally think of him....or her....as being the owner of the insurance agency down the street, the law practice near your office, or the public relations firm downtown.
This is a real life story about business from the owner's perspective. When we're done, I hope you share this story with others. Money and "fairness" are complicated.
In 1986, shortly after graduating from the University of Pennsylvania, Paul Downs decided that he wanted to make furniture. Initially, it was just something to do until he started graduate school. Before long though, Paul realized he enjoyed building things more than he desired furthering his formal education, so he became an entrepreneur. Was his business a success out of the gate? Not at all. After all, the average sale for residential furniture was fairly small and the sale itself wasn't easy to get. Still, he hired his first employee the following year and the business grew. Being a craftsman by trade and a self-taught businessman - and realizing that he was good at the former, but not very good at the latter - Paul eventually took on a business partner. The partner brought additional capital and real-life management skills for running the business into the mix. More than that though, Paul found that running his business was INCREDIBLY LONELY....and he wanted someone with whom to share the highs and lows of the experience.
The feeling of loneliness is one of the most difficult things about being an entrepreneur.
Growth came about in a very unusual way. Back in 1999, Paul's company built a conference room table at a client's request. A few years went by, the internet came along, and an entirely new approach to marketing was created. In 2002, Paul had his company's first website built and in 2003, a picture of that 1999 conference room table was placed on the site. People started calling about those tables and as a result of that randomly posted picture, Paul found a new and potentially profitable market.
It's better to be lucky than good sometimes.
With the help of a business associate, by January of 2008, sales for those conference tables were coming in at a rate of $250,000 a month. With the increase in demand, more employees were needed and they were hired. The biweekly payroll expense that had been $21,000 in 2007.....was now $45,000 in 2008. Let's pause and think about that for a moment. Paul's company paid employees every two weeks or 26 times a year. That means this expense...this one expense....was $546,000 in 2007. And it had increased to $1,170,000 on an annualized basis in a single year. Was that Paul's only expense? No, of course not. He also had to pay the rent on his building, the cost of equipment, electricity, workers compensation, liability insurance, health insurance, auto insurance, the cost of supplies, marketing expenses, and taxes too. Oh yeah, it's important to understand that many of those expenses had to be paid before his company even made a sale.
Managing cash flow and expenses as a business owner is a very big deal. With the growth of Paul's company, expenses were getting out of control and cash was going out the door faster than it was coming in. As the company had broken the $2 million sales barrier the year before though, Paul was hopeful that 2008 would see the company to its first profitable year since 2002. His annual salary in 2008 was $80,000 and he wasn't doing badly. As you read this story though, ask yourself if you'd have been willing to put yourself at risk the way Paul did for the kind of money he was making.
In the midst of this terrific growth, a very bad thing was starting to be noticed in the national economy. Today, we look back and call it the Great Recession. Remember it? Credit completely dried up. In less than two years, the Dow fell by more than 50%. At least seven million people lost their homes and 8.4 million people lost their jobs. Everyone was worried about their jobs and their families. And their money.
Try to imagine what it was like for your neighborhood entrepreneurs though. Like you, they worried about themselves and their families, but they also worried about the people that worked for them. This was true whether they employed one person, a dozen, hundreds, or thousands. In my experience, business owners usually feel a deep degree of accountability to their employees. They know that the financial well-being of their employees is dependent on the jobs they provide.
On top of that natural feeling of accountability, consider the financial stress of owning a business. In 2008, Paul was in a fair amount of debt: He owed $110,000 to vendors, $80,000 to the bank through a business line of credit, $270,000 to another bank as a result of his partner's personal line of credit, and $40,000 in credit card debt. He was also a month behind in rent and still had to make sure he could cover payroll for his remaining ten employees. And he had to do this in the face of dwindling sales and with the reality that he'd already let go 13 employees.
That, ladies and gentlemen, is what life can be like when you're an owner.
With the pressure they were under, Paul and his business partner started to have disagreements on what should be done. The partner wanted to take the remaining cash flow (about $200,000 in accounts receivable) and use it to pay off the debts and close the business. Paul wanted to stick it out. Because the partner felt Paul wasn't listening to his point of view, the partner unilaterally used $80,000 of the of the company's cash to pay off the business line of credit and closed the account. When Paul discovered this, he was mad. But he also understood his partner's perspective. Nevertheless, not only did Paul now NOT have $80,000 with which to run the business, but he also had a line of credit disappear that was a significant source of working capital for the company.
Do most employees have any understanding of this kind of thing? Heck no.
2009 was a very difficult year. The stress caused Paul and his business partner to eventually go their separate ways. Now alone and trying to keep the company afloat, Paul cut the wages of his remaining employees by 15% and he cut his own salary by 25%. In order to reduce operational costs, he simplified the product line-up and implemented the use of standardized parts. And he finally learned how to manage the cash flow of his business. He set up a spreadsheet that showed every dollar coming in and every dollar going out. While barely surviving, Paul still needed to market the company in an effort to gain new sales, so he raided his son's college fund to build a new website for the company.
Let me say that again: He used his son's college fund to pay for a new website.
Would you have done that?
Did Paul's company eventually go under? No! I'm happy report that the company survived and that Paul Down's Custom Conference Tables appears to be doing quite well. The company has grown significantly since the Great Recession. He's hired a good team and he's paying them as well as he knows how. Is Paul the perfect entrepreneur and business leader? No....and he'd be the first to say that. But no one is perfect.....and that is a critical point I'd like to stress. Entrepreneurs and business leaders are human. They make mistakes. Like most of them though, Paul is trying to be better and he's putting his money where his mouth is. He's taking risks that few are willing to take and he is creating jobs and a product people want.
I believe he deserves to be respected for that.....as does every entrepreneur. And all of them deserve whatever profits come their way.
Thoughts on Profits
As the principal of a wealth management firm, I often have discussions regarding incentive compensation and retirement plans with business owners. Inevitably, we end up in conversations over the pros and cons of profit sharing with their employees.
As you might imagine, determining how to share company profits with employees is an issue with which Paul and a lot of other owners sincerely struggle. Owners know that the profits their companies earn wouldn't happen without the hard work of the people that work for them. They also know that employees expect to get paid....regularly....even when the business isn't profitable at all. Because of that, from the owner's perspective, profit sharing plans can look like a "heads I lose, tails you win" scenario. After all, employees don't share in the pain when the business is losing money....but employees want to share in the profits when the business is making money.
Risk, return and profit sharing are a difficult subjects to tackle in the real world. Frankly, I don't believe there is a good answer that can be broadly applied to every situation. What I do believe though is that having a broader perspective of both sides of the issue is important. Our social fabric requires it.
I hope you enjoyed this article. If you'd like to learn more about the values-based planning we offer through our Family Bank program or the expense reduction ideas we have for business owners, just click on one of the buttons below.
Bruce Wing is the president of Strategic Wealth, LLC, a Registered Investment Adviser located on the north side of Atlanta.
Entrepreneur, financial guy, husband and father of two great kids.