Why a Friend Shouldn't Run Your Business

Editor's note: This is the 11th in a series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed. Problem: Abdication of Leadership The Perpetual Change Recycling Plant in Tennessee holds contracts with several municipalities in the area, but it's losing money every month despite more than $20 million a year in revenue. The problem started when the owner, Ray, began delegating more control to the general manager, a trusted friend who in the past showed himself to be quite competent. Ray figured he'd worked hard his whole life and now it was time to switch to retirement and enjoy the fruits of his many years in business. After all, the recycling business was growing, Perpetual Change was the only recycling plant in the area, and it was running so smoothly that it no longer required his hands-on leadership. Or so Ray thought. Every major financial decision about the business is being handled by this GM. Ray doesn't even sign his own checks. But some people work well as subordinates as long as the boss keeps constant tabs on them. They're excellent "order takers," but on their own, they're not quite as effective. They need direction. They need a leader. Mounting DebtsThe company now owes the bank about $6 million, and it's in arrears to the IRS to the tune of $500,000. Profits are sinking faster than a crate of old refrigerators in a sewage sludge dump. There's nothing dishonest going on that we can tell. Just lousy judgment on the part of a manager who doesn't have skin in the game and doesn't care as much as the owner should. The GM's poor decisions contributed to a big pile of debt. He spent hundreds of thousands on leasing unnecessary equipment. Left to their own devices, workers have been phoning it in and not following through on tasks. As a result, sales are also in decline, and if operations don't improve, Perpetual Change can expect to lose more municipal contracts to a new recycling plant that just sprang up in the next county, 30 miles away. Meanwhile the owner, who felt entitled to live the good life, had a six-figure country club membership, a $1.5 million primary mortgage, a second home with a $600,000 mortgage, and an $80,000 boat loan. He has been in a state of complete denial about the financial health of his business, taking as much money out of it as he can. Until recently, Ray was almost never in the office, and when he was there he never looked at the books or saw that there was no more milk left in this supposed cash cow. Solution: Be a Control Freak As a small business owner, never expect to retire unless you sell your business for a tidy profit, and that's just not going to happen if you let the inmates run the asylum. It's your job to know everything that's going on, from sales to accounting, to how much is being spent out of petty cash on coffee and doughnuts for the morning meetings. Micromanaging is a good thing. You do this by putting a system of "fingertip controls" in place. Any time, and from any location, you should be able to call up a department head and get an exact snapshot of what is going on with that aspect of the business, in real time, just as if you were there breathing down every employee's neck. I call these snapshots "flash reports," and they're an essential tool for running your business, whether it's from your winter home in Boca or right at your office desk. My work often requires me to be off-site, but I check in with every department daily. I still insist on approving any check of more than $500. This way, there are no surprises. I look at my financials at least once a week, and I demand to see everything that is coming into and going out of my business checking account. If something is wrong, my system catches red flags so we can fix problems early. You have to. In a small business, there's no room to fail. Little problems can get out of control all too quickly. Docking the BoatRay's a long way from having fingertip controls. First, he has to show up at the office and confront the reality of his crummy financials. We've finally persuaded him to quit his country club and sell the second home he just purchased to pay off some of his debts. He's keeping his boat, but he'll dock it for now. More than saving money, this will get him back into the mindset of staying focused on the business. We're also standing over Ray as he personally contacts every client that has stopped doing business with Perpetual Change. It makes a difference when the owner gets involved in sales and makes customers feel valued. We're teaching him how to listen objectively to customer complaints and convince them those complaints will be corrected. And he's making good by cracking the whip and making sure employees follow through on his orders. It's going to take a few months, but with consistence and persistence, Ray will find and fix every leak and operational problem in his business from the ground up. He should be debt-free within a year. Ray might not recoup all the business he lost, but with the change in attitude we see taking place, he may end up with more new clients than when he started. This will happen, however, only if he maintains his focus on sales and keeps a watchful eye on the day-to-day activity of his business. This is how it's done. You can delegate some tasks, but that is no substitute for hands-on management. And there's no such thing as being too involved. Sure, Ray can enjoy going out on his boat again one of these days, as long as he checks in at the office and remembers what it takes to pay the bills. —with Samantha Marshall

To continue reading this article you must be a Bloomberg Professional Service Subscriber.