Norm Brod­sky

Sooner or later, most of us get into dif­fi­cult sit­u­a­tions. And that’s when char­ac­ter is tested

Inc. (USA) - - DEPARTMENTS - Norm Brod­sky

What you learn when the go­ing gets tough

RUN­NING A BUSI­NESS is a se­ries of de­ci­sions: where to lo­cate, what to pro­duce, what to charge, how to dis­trib­ute. There are con­se­quences—per­haps bad ones—to what­ever de­ci­sions you make. You must take re­spon­si­bil­ity for the con­se­quences, or you’ll never learn from your mis­takes.

That’s why I’m re­luc­tant to dole out ad­vice to young en­trepreneurs. Oc­ca­sion­ally, though, I am con­fronted with a sit­u­a­tion where I do of­fer very clear and firm ad­vice. I ran into one re­cently with an en­trepreneur I’ll call Clarence.

His com­pany sold a consumer prod­uct with a unique twist. (I won’t be more ex­act, for rea­sons that will be­come ob­vi­ous.) He was in dire straits when he came to see me. Clarence was be­ing hounded by cred­i­tors and couldn’t re­pay his $750,000 bank line of credit. When I ques­tioned him about his sales and mar­gins, his an­swers were a lit­tle too vague. I asked to see his fi­nan­cial state­ments. “But I have to meet with the bank,” he said. “My lawyer says I should file for bank­ruptcy.”

“Don’t do any­thing now,” I said. “Get me your fi­nan­cial state­ments. I’ll tell you what I think.”

He seemed des­per­ate, but I didn’t hear from him. Six weeks later, the per­son who in­tro­duced us said Clarence needed to see me ur­gently. He brought me his fi­nan­cials. I took one look at the bal­ance sheet and said, “I hope you didn’t give this to any­one else. These are fraud­u­lent num­bers.”

“I gave it to the bank,” he said. “I have a meet­ing with them Mon­day. What’s wrong with it?”

“Ac­cord­ing to this bal­ance sheet, your cur­rent as­sets ex­ceed your cur­rent li­a­bil­i­ties by more than a mil­lion dol­lars,” I said. “Why don’t you just pay the bank the $750,000 you owe them?” Clarence ad­mit­ted that he couldn’t, even though the bal­ance sheet showed he could. I asked how much in­ven­tory he had. At first, he said $150,000 worth—the amount he claimed he could sell it for, an ir­rel­e­vant num­ber. “How much did you pay for it?” I asked.

“Sixty thousand dol­lars,” he said. The bal­ance sheet showed $970,000 in in­ven­tory. “That’s fraud,” I said. Clarence protested that the ac­coun­tant had told him he had to pro­vide a big­ger num­ber to the bank. “Did you read the first page?” I asked. “It says all the num­bers come from the client and haven’t been au­dited or ver­i­fied. What about this num­ber— pre­paid ex­penses of $600,000?” He said that he had paid cer­tain ex­penses in ad­vance. “You paid $600,000 in ad­vance?” I said. “Baloney. I’ll bet the real num­ber is close to zero.”

Ac­count­ing rules al­low you some choice about rev­enue recog­ni­tion, in­ven­tory treat­ment, amor­ti­za­tion, and the like. You can be ag­gres­sive but must be le­gal. In his desperation to save his busi­ness, Clarence crossed a line that could land him in jail. Fail­ure may be hu­mil­i­at­ing, but isn’t it prefer­able to prison? In­deed, bank­ruptcy is al­most a right of pas­sage in Sil­i­con Val­ley. You can re­bound from a bad deal or a bank­ruptcy. You are un­likely to re­bound from a jail cell.

Clarence was be­yond my help. Get the best crim­i­nal lawyer you can find, I ad­vised, and tell the truth. “If you meet with the bank be­fore see­ing an at­tor­ney,” I said, “you’re out of your mind.” He left, clearly shaken. Our mu­tual friend later asked why I hadn’t sug­gested that Clarence just tell the bank he’d erred, and have him pro­duce a cor­rected bal­ance sheet. “Be­cause then I’d be­come part of a con­spir­acy to com­mit fraud,” I said.

The les­son here is this: No mat­ter how much pres­sure you’re un­der, don’t ever lie on your fi­nan­cial state­ments to your bank. I just hope Clarence can learn that les­son with­out hav­ing to pay a heavy price.

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