Thursday, July 22, 2010

The Journey Continues (Pt.7) - Our Biggest Customer Goes Supernova

The year 1987 was pretty much the high water mark for the economic boom attributed to Reaganomics. At the time I wasn't paying a whole lot of attention to things like the stock market, but what I do know is that we were exceptionally busy at work. Even the stock market crash of 1987 seemed to have little impact - at least at first.

In addition to my furniture work there was also a great deal happening in my personal life at the time. In 1983 I met a wonderful gal named Teresa, and we ended up getting married the following year. In 1985 we bought our first house togther, and in 1987 our first child was born - a son by the name of Bradley.

As a mirror to that timeline my parents split up and divorced, which meant that in 1987 I ended up buying out my mother's half of the business as part of her settlement with my father. Later that year, as a complete surprise to me, my father suddenly announced that he was semi-retiring to Florida. The news caught me totally off guard.

Suddenly, at the age of 28, and with a wife and baby at home I found myself thrust into the role of sole proprietor of a busy custom woodworking shop that was now employing a staff of 20. I worked my butt off day and night to stay on top of things, and it was overwhelming to say the least.

On a personal level it became exceptionally difficult to work the long hours that are the norm for small business owners, because by the time my son turned the age of one he had become accustomed to the routine of me coming home at night to play and spend time with him. On nights when I had to go back to finish a project to meet a deadline he would cry as I headed out the door. It broke my heart when this happened.

During this time Richard Mark was our biggest customer. This showroom was owned by a fellow who loved to live large, and I was never comfortable with this guy's ability to spend lavishly on a lifestyle that was far bigger than his business could sustain. If you can afford the lifestyle - that's one thing. But if you're burning through money faster than it's coming in: that's a disaster waiting to happen.

As long as orders and deposits kept flowing in faster than he could spend it, I figured he could stay above water. But once the tide turned, I knew it would be time to get off the proverbial beach - because the tsunami of economic reality was going to crash hard.

After the stock market crash of October 1987 it didn't take long for the warning signs to begin to flash. Initially it became evident that new money was being used to pay older bills - a classic example of "robbing Peter to pay Paul". Things gradually worsened as evidence of check kiting began to appear.

To understand what check kiting is, one has to realize that in the 1980s electronic banking was pretty much non-existent for small business. When you wrote a check that was drawn on an account in one bank, and deposited in an account at another bank, the process of clearing and transferring the funds was mostly a paper process that sometimes took days to work through the system. This window of time was known as a "float", and it created the opportunity to write checks and make payments in situations where there were insufficient funds in the account.

In light of the eroding financial situation at Richard Mark, I stepped up my efforts to transition into more work from companies such as Brueton, Dakota Jackson, Karl Springer and Ron Seff. At Brueton I was always turned away stone cold at the door. The folks at Springer seemed immersed in their own internal chaos, and I also made little headway there. But fortunately some doors were opened at Ron Seff and Dakota Jackson. These latter two seemed to have a backlog of work that would give them some forward momentum in the face of a rapidly slowing market, and I was happy to segue into these new opportunities to make tables, wall units, built-ins and other assorted furniture.

By 1989 the situation at Richard Mark had reached detonation point. Although we were now shipping on a truckload basis, the payment situation had deteriorated to the point where old balances weren't getting paid until new shipments were ready to deliver. Checks from Richard Mark were now bouncing on a continuous basis, with new checks replacing old checks at a rate that made it near impossible to figure out what our true account balance was at any given time.

This dynamic also created a situation of perpetual financial entrapment, because the only way to leverage payment for owed monies was to literally roll over debt with new deliveries. In this scenario I figured there was only one way of escape, but it would involve a 2-step process.

The first step was to create a "phantom truck". For one month we went through the motions of pretending to work on a new batch of orders. Phone calls were made and faxes were exchanged to maintain the illusion of business as usual. Meanwhile, we established an account at Barclay's Bank in New York - at the same branch that Richard Mark had their account.

The deal was that when the next truck was ready to ship Richard Mark would make a direct deposit into our account at Barclay's. By this point Richard Mark was struggling to pay balances on old orders that had already been delivered and THEY had been paid for. Given the small float window of an intra-bank transaction I knew there would only be a brief opportunity of time to clear our funds from the account before that check also bounced.

On the scheduled day of delivery I caught an early flight to New York and cabbed myself to a street corner opposite the bank. And there I waited. Shortly after the bank opened at 9:00 a.m. - and right on cue - I watched from a distance as Richard Mark's accountant walked down the street and into the bank to deposit the check as agreed. I knew the check was worthless, and so did the accountant, but Barclay's wouldn't figure it out until the paperwork made the round of the desks.

After watching the accountant leave the bank I made my way inside, and drew a certified check to empty our account. Due to the nature of the paper system at the time the funds were there - at least as far as the bank was concerned. Therefore they didn't balk at giving me the money.

With certified check in hand I called Richard Mark's president to give him the news.

To make a long story short: our relationship with our biggest customer was now terminated.

As difficult as this was to do, the outcome was inevitable because Richard Mark was now unravelling to the point of no return. Under these circumstances I felt it was better to decelerate our company now than go full bore into financial oblivion as an unsecured creditor.

Teresa was also now pregnant with our second child.

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