Laying people off sucks…

 
February 21, 2019 STAAR 0 Comments

but going bankrupt sucks worse. It all started when one of our largest customers stopped paying us for work we had already done. They had always been late with payments but this time it had stretched on for almost 6 months. In a service business like mine, that’s an unsustainable problem. Revenue is oxygen and I was gasping for breath.

Setting the Stage

At our prime, we had over 70 employees and a thriving software development business. Now, most of the employees were sitting on the bench, and we had no work coming in to offset the cost. How was I going to make payroll? As the entrepreneur, founder and owner of the company, the responsibility was all mine. At first, I thought we could weather the storm. I did all the right things – I contacted loyal customers, offered discounted rates, updated our website and marketing materials, started praying with a passion. But nothing worked. No revenues. Endless expenses. It felt hopeless.

I was making a lot of mistakes, too, which I can see now in hindsight. One of the most painful mistakes was that I kept people on the payroll far too long – six months too long. In over 10 years in business, I had never laid anyone off, and for a while, I thought we could make it through and I could keep my perfect record. We’d been through tough times before. In years past, I had secretly taken myself off the payroll, for weeks or months at a time, in order to make sure my employees got paid and felt secure with their job. But I had already stopped paying myself two years ago. Now what?

It got worse. I expanded our business line of credit and ran it up to the max. That covered two more payrolls. Then I took out a second mortgage on my house, borrowed against my 401K and got a line of credit on my house. Altogether, it enabled me to make payroll for three months. But I’ll never forget the day when I hit the wall.

The Big Event

It was a Friday morning. My phone rang and it was Joe, the VP of Technology for my largest client. With great sadness and profuse apologies, he told me that his company was going into bankruptcy. Joe had just lost his job along with everyone else who worked there. They weren’t going to pay me. Ever.

Joe’s company owed me close to half a million dollars at this point, and now all I could think of was my employees. I would have to lay off most of them. I felt like someone had kicked me in the gut. It was one of the hardest things I have ever done. These people had depended on me to provide them with a secure job and an income. Many of them had families, mortgages, kids in college, medical issues. It was a huge responsibility and I had managed to do it for over 10 years, but now it was over. The company was falling apart and I couldn’t help them anymore. I couldn’t even afford to give them a severance package.

During the layoff process, I learned an important lesson: When you lay people off, they’re going to be mad at you. It doesn’t matter why you laid them off. It doesn’t matter that you second-mortgaged your house. It doesn’t matter that they’ve been making more money than you for the past two years, or that you’ve been working without a paycheck for so long you’ve wiped out your savings. I thought we were a family. I thought we had a special relationship. I thought we were all loyal to each other. I thought we were all in this together. But at the end of the day, we weren’t. They came to work every day because they got a paycheck for being there. They just got laid off and they were mad. Worse yet, I couldn’t really blame them. I felt like a complete failure.

I was imminently forced into business and personal bankruptcy. But I learned a lot of lessons and I have applied them to every entrepreneurial business I’ve had since then, with much better success!

Lessons Learned

  1. Beware of customers who chronically pay late. Don’t keep working for them! Those are not the kind of customers I want to have. I kept working with my flagship client out of desperation, but all I got out of it was even more debt. By the time they finally declared bankruptcy, they hadn’t paid me in so long they weren’t a client any more anyway.
  2. Never have one client who comprises more than 20% of annual revenues. I’m honestly not sure if 20% is the right number. I’ve heard some companies strive for 10% or even 5%. The lower the better! If losing one client can cause me to lose my business, then I’m likely to make poor business decisions related to that client.
  3. Create a contingency plan based on numbers and follow it! I was flying by the seat of my pants, making decisions based on gut instinct and blind hope, not facts. In retrospect, I should have known exactly when it was time to lay people off and it would have been a year earlier than I did it. I should have had trigger points in place based on cash flow, collections and costs that would have guided me to make the right decisions at the right time. Looking back, if I had taken action sooner, I might have been able to save that business. Instead, I ignored the numbers, hoping that things would get better. But they didn’t.
  4. Lay people off sooner than later. I should have laid people off at least six months sooner and not gone half a million dollars in debt. I remember thinking how much I wanted to keep them employed and how difficult it would be to replace them. What if a great project came in next week and they were gone? My eternal optimism clouded my judgment. I was trying to avoid the unpleasant, frightening task of telling people they no longer had a job. So I spent months worrying about it when I should have just done it.
  5. It’s better to cut once, deeply, in a layoff, than to have several smaller layoffs. By the time I finished laying off 90% of my staff in three separate batches over a three-month period, morale was in the toilet. Better to rip off the band-aid all at once.
  6. Don’t mix personal and business funds. I shouldn’t have taken myself off of payroll. I shouldn’t have invested every penny of my personal savings and borrowed against my personal assets to fund the business. If I can’t afford to run the business from within the business, I don’t have a business! (See Lesson #3.)
  7. Never have all your eggs in one basket. As a serial entrepreneur, I will never have only one business again. I make sure I’m diversified in several businesses. I have partners who help run those businesses or run them entirely. And I make decisions based on numbers. The numbers don’t lie. I can lie to myself all day long if I’m using hope as a strategy. But I can’t lie about what the numbers are telling me. Dashboards and metrics are my friend!

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Submitted by:  Pamela F., Minneapolis, MN

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