Rewind. The year? 2006. Times were good. Margins thick. There was money to be made. Lots of it, even if you did have to split it with Uncle Sam. It had been that way for a while. Years. The coffers were full. The pundits and talking heads argued on television screens across the nation—bubble or no bubble? Was a real estate bubble about to burst? Yes, and from my perspective, it was apparent.
With a wife in real estate, racking up one deal after another and a booming drywall business, our life seemed wonderful. But something was wrong—really wrong. The lenders were lending to anyone who could breathe and the borrowers borrowing were breathing their last—breath that is. Hyperventilating. It was all based on the delusion that real estate appreciation would continue.
Borrowers were telling lenders what they wanted to hear, and the lenders were listening. Stated income (deadly as it was) was enough to qualify. Make up a number big enough to qualify, and you qualify. How much does one need to make annually in order to qualify for the payment—payments that were based on interest rates designed to tease you into an agreement that you can’t keep? Teaser rates, based on entrapment and greed.
Fast forward to 2007. Not so good and getting worse. Though there were some that the master puppeteers deemed too big to fail, it wasn’t anyone we were dealing with—not directly anyway. There were plenty of general contractors and subcontractors destined to bite the dust, travel through gravel and shovel through rubble. Some in the near term, many, many more in the long term.
The survivors were likely to be hurt. We were among them—the survivors. Nevertheless hurt—and that was not the least of it. We still had six more years of famine. We would ultimately be hurt over and over again. Hurt by several weak-kneed GCs, one in particular with whom we had done business with for a long time. Thirty years. No problems. Ever! Paid in full, like clockwork. That is, until the clock didn’t work.
But I had faith in them. Such a track record and payment history. Not to worry. Just a little hiccup, right? Wrong! Buuuuurp, followed by serious indigestion. They were about to go bust and there were others, others with whom we were doing business—all total, to the tune of about $300,000 of receivables. This was money earned, all the associated costs paid, but thus far, to date, un-collected.
Man! Could I use that money now? That condo in Cabo is looking pretty good right now. But I think it is forever sunk somewhere off shore. All too true. Painful, but true. So what did we learn about getting paid?
Move your cursor. Yes, go ahead and slide your mouse forward to the pull down menu and click save. You get it. Rewind, fast forward and now save. Save what you’ve heard, store it in cerebral hard-drive and back it up in your memory bank forever. Let’s open a new document. Let’s call it “Lessons Learned.”
As has been said, hindsight is 20-20. I can assure you it is. So what did my $300,000 buy? How does it translate into changed behavior—changed behavior that may well have saved some, if not all of that money?
By the way, don’t you dare think this isn’t relevant unless there is a recession. It’s bigger than that. It applies to every business, everywhere, all the time. Don’t be so small minded. Open up your brain, expand it into the here and now and let the following info flow in. This applies to you, me—us. All the time! What should one do in such circumstances?
Due Diligence
You’ve got to know. Know what? Know what the heck is going on. Don’t be complacent, ignorant and incompetent. Pay attention. Pay attention to who owes you what, and get on it.
You must also know, protect and preserve your legal rights. I’ll remain a bit ambiguous here since our readership is nationwide and the laws vary from state to state. In California, for example, where I’ve done business since 1976, there is a very specific set of time-sensitive criteria, a very precise framework that you must stay within throughout the course of the project in order to protect yourself.
It must be carefully documented at various stages from job start as well as upon completion of the project. It is absolutely critical if you are to keep your lien rights intact. Deviate from that, fail to do something specifically required within the specified time frame, and your lien rights are gone.
In addition, as far as I know there is no protection whatsoever from bankruptcy. During the Great Recession, the customer I referred to earlier, the one with whom we had done business for decades, went bankrupt. We are still waiting for what is rumored to be 30 to 40 cents on the dollar. When the debt was $120,000, nine years later—I’ll take the 30 cents all day long. Nevertheless, the only reason I have any right to it is that every “I” was dotted and every “T” crossed when it came to protecting our legal rights.
Regretfully, we acted too slowly. There were others who acted swiftly and were paid. We let the customer get too far out in front of us. We completed an entire phase of several large homes; in addition, we delivered the next phase of materials without having been paid one cent. Various draws to which we were entitled went unpaid and unaddressed. Having worked with them for decades, I assumed that they were good for it. They weren’t.
Looking back, we should have stopped the job or at least slowed the project down significantly to get their attention. I was a bit too fat, dumb and happy, giddy from all the “good” years and a little drunk with profit. That’s what you get when you don’t mind the store. You’ll get your fingers caught in the machinery, lose an arm or a leg, if you survive at all.
So then, know who owes you what and when, as well as what’s required to protect your legal rights, and do what’s necessary to protect yourself in a timely manner.
Be Proactive
This is good advice, a two-word phrase that applies to everything in life and business. For many in the business world it already seems worn out and over-used. Not in my book. Let me freshen it up with my own definition: “Take the necessary action before the action is necessary.” Or this: “Don’t wait until you have the need to develop the provision to meet that need.” Nowhere is this any more important than when it comes to protecting your hard-earned profit.
Over time, we found it helpful to develop a systematic approach for precisely how to respond at various milestones when it came to receivables. We answered the all-important question: “Who will do what by when?” By doing so, it provided a clear path to our staff as to what to do immediately upon execution of a contract, straight through to full blown legal action for non-payment. Each increment toward the worst-case scenario needs a clearly defined course of action. Doing so minimizes emotion, which sometimes interferes with sound judgment and impedes action. By answering the various questions typically posed, you facilitate a prompt response.
Use Your Leverage
Slow pay is a warning. You are being warned. The handwriting is on the wall—drywall that is. Act quickly and use whatever leverage you have the legal right to use. Take action while you still have leverage. The longer you wait, the fewer options you have. Eventually, all you can do is wait. Don’t wait until then.
Procrastination is not a virtue. Don’t confuse it with patience. I can’t overemphasize the importance of this. If someone is past due, make it your business to know and exercise your rights—the faster, the better. It doesn’t matter who it is or how long you’ve done business, no customer is exempt. This applies to anyone and everyone. Business is business. We do this for money, profits—not practice. Minimize your risk by moving fast.
In our situation I was able to get into the site and remove our uninstalled materials. If not, we would have lost another $40,000. Legally, we didn’t have the right (not in California), but I’m glad we did it anyway. Crazy laws! Once the materials were on site, they were no longer mine, even though they hadn’t been paid for. We could have been arrested for trespassing and theft. Nevertheless, I sent my supplier back and removed all remaining materials. The weeds were knee-high and the project was posted with No Trespassing signs. Tough luck.
Get Their Attention
Pay them a visit, face to face, one on one. If necessary, camp out in their office. Yes, I know that sounds extreme, but desperate times call for desperate measures. Ring their phone off the hook. Climb all over it. Get on it like a duck on a June bug. It’s the squeaky wheel that gets the oil.
Make sure you get an audience with your debtors and that they know you’re not going to take this lying down. If necessary, threaten them with everything you have in your legal arsenal. Be wise. Don’t over-react; you don’t want to burn bridges unnecessarily. On the other hand, you don’t need a bridge to nowhere. Appeal to them, reason with them, and work with them, but don’t play games with them.
Though I never personally took this approach, some contractors I know feign weakness. Feign desperation instead—and if you’re desperate, all the better. Tell them so. Tell them that you need it to make payroll, that you can’t go another week without being paid. As I said, I’ve never done so, but I know a fellow contractor who did, and it worked well for him—multiple times over several decades.
Position Yourself and Pull the Plug
Avoid allowing anyone to get deeper in debt to you. Be careful. Many a well-meaning business person has made this mistake. One supplier I know had a relatively small customer beat him out of $1 million. How? First he let him get in significant debt, say $300,000. Then he didn’t want to pull the plug on him because he thought doing so would mean losing his $300,000. He continued to provide credit to a customer who wasn’t credit worthy. Not good. That went on for about two years as the supplier got paid in dribs and drabs and the customer slowly reached deeper into the supplier’s pocket. Finally, a day of reckoning came and the customers’ business folded. To make matters worse, the supplier hadn’t exercised “due diligence” to protect themselves properly. The result? Default with no legal right to collect a single penny.
My advice? Cut the cord and your losses. Do so wisely, with a carefully thought-out strategy. Position yourself as best you can before doing so, but whatever you do, don’t allow anyone to get deeper and deeper into debt to you. Get yourself in position and shut it down. Meanwhile make absolutely sure you are protecting yourself legally.
What about an Attorney?
While we are on the subject of legal counsel, let me get this said: Nothing within the article should be construed as legal advice. At best, this is a headful of common or not-so-common sense, purely based on personal experience and street smarts. With nearly four decades of mistakes and a modicum of success, I’ve learned a thing or two that you may find helpful.
So then, what about an attorney? I’ll be the first to admit: All too often I’ve been disappointed in the “results” (or lack thereof) when it comes to legal action. Both I and other colleagues have incurred even greater losses attempting to recover our initial loss by involving an attorney. Getting ripped off by a customer and increasing your loss with attorney’s fees that doesn’t get you paid, just adds insult to injury.
Pick your battles and who you take with you to war. There is a lot that can be done less expensively, with a competent person on staff. Copy your attorney on any correspondence, keeping him apprised, meanwhile alerting problem customers subtly that you are notifying your attorney. Doing so may help and shouldn’t cost you a dime.
Having said that, I sincerely believe that having a good attorney is just as essential to business as having a good accountant. There are times, however, when you need professional legal help, and you better get your attorney involved. Like your accountant, the attorney needs to be a good fit, one proven to have your best interests at heart and hopefully someone you develop a long-term relationship with early on in your career. Your best bet is to find reputable, qualified legal representation, suitable to your needs, with references you know and trust.
By the Way …
Avoid being a subcontractor of another subcontractor or even more—a sub of a sub of a sub. Been there, done that. The closer you are to the bottom of the food-chain, the more likely you are to get nicked—or worse yet, filleted financially. Learning that lesson cost me another $50,000, but for you, it comes in the form of free advice. Take it or leave it.
In the end, it’s up to you and you alone to make sure you’re getting paid.
Doug Bellamy is former president of Innovative Drywall Systems Inc. dba Alta Drywall, Escondido, Calif. He is known for his original thought, innovative approach and the personal development of unique processes, systems and procedures. He is available for consultation, business management seminars and training. Visit him on LinkedIn or contact him at [email protected].
