Get out a box of Kleenex. This is a really sad story. I mean that sincerely. This situation upset me more than any other business situation I have endured over more than twenty years in practice. You may already be familiar with this story.
Adam was an elderly gentleman, who owned a landscaping services company located in the Garden of Eden. He had two sons, Cain and Able, who each owned ten percent of the company. Adam had retired fifteen years earlier and left the operations to his sons. Able ran the office, created proposals, and was in charge of sales. Cain ran the field operations and took care of the main customer, Jehovah. The company had been profitable since nearly the beginning of time.
As Adam neared age sixty, you can take the Bible ages and knock a zero off, he retired and put the company in the hands of his sons. Adam, however, kept his eighty percent ownership in the company. He reasoned that if his sons mismanaged the company, he could take back control and right the ark. Noah hadn't been born yet. Adam also owned the grass hut that the company used for office and warehouse spouse. He didn't get a big salary out of the company in retirement, but he took enough to live on. He also charged the company rent on the grass hut office space. He certainly wasn't wealthy, but had enough income to live comfortably in retirement. Fortunately, financial planners had not yet come into existence.
Adam planned on passing on his majority ownership of the company to his sons at death. However, after a few years, Cain and Able grew unhappy. They wanted to own the company right away. They weren't willing to wait for Jehovah to transfer Adam out of the Garden of Eden into heaven. They had no intention to cheat Adam. They just wanted to purchase his ownership stake for a fair price right away. That purchase price would allow Adam to continue living at his current level in retirement.
You might fairly ask why the sons couldn't wait for Adam's death since they pretty much already controlled the company. Able was in his forties, and Cain was in his late thirties. They simply didn't want to wait another twenty years potentially to own the company. I thought their plan made good business sense. The purchase agreement could even be written so that Adam could reclaim the company in the event the sons defaulted on the agreement. Over a period of a couple years, the sons presented their plan several times, but Adam wasn't interested. They told him that his name could be removed from any company guarantees, and he would have no further personal risk in the company. He would continue to get his income and rent for the grass hut. Nonetheless, Adam wasn't interested, which was his right.
Able was quite a skilled business manager and salesperson. He had helped the company grow substantially in the years he had managed it. Since the company was an S corporation (LLC's weren't invented until several hundred years later when Moses delivered the eleven commandments, the eleventh of which was “Thou shalt create limited liability companies to eliminate personal liability.”), in theory Adam got eighty percent of all the profits Able worked so hard to create.
Able wasn't willing to wait any longer. He left the company and went out out his own creating a company to build residential huts in Eden. The company's stockholder agreement was set up so that Able received basically nothing for his ten percent ownership share and many years of hard work. Able left anyway, since he knew he could recreate his success with his new company.
That left Cain in charge of the company. Since he had been the field manager, he didn't have experience in the other areas of the company. Adam was well aware of this. He asked me, the first CPA in Eden, to keep a close eye on the company's financial operations. I was a little reluctant to take on so much responsibility. I knew their main customer, Jehovah, wasn't a big fan of CPA's and money changers in general. Five thousand years later, his son threw us out of the temple. We know the Garden of Eden existed five thousand years before the birth of Christ, because Sarah Palin tells us so. She discovered this fact around the time Al Gore discovered the internet. (I am an equal opportunity political basher.)
For the first few months, the company performed pretty well operationally and financially. I met every month with Cain and his bookkeeper, Ruth. I was responsible for Ruth's hiring, and I knew her well and trusted her. She was one of the ten percent of bookkeepers, who are competent. (Please refer to earlier blog entries to get my opinion on bookkeepers.) I knew Ruth would keep me informed.
Early on in Cain's tenure as head of the company, he asked me if I planned to report everything he did to Adam. He told me he didn't want to be micro-managed by his father any more than Able did. I agreed that I wouldn't run to Adam with an account of every event. However, I did tell him that I would report anything I saw that was significantly out of order.
A couple months later, I got a call from Ruth. To obtain a big job, Adam had contributed $250K to secure a contract for bonding on a job. A bond company was guaranteeing to Jehovah that the company would be able to complete a very large project. If the company failed to complete the project, the bonding company would pay to complete it. Of course, the company had to pay the bonding company for this guarantee. In addition, the bonding company required the company to place $250K in an account that could be accessed by the bonding company in the event Adam's company failed to complete Jehovah's job. Jehovah doesn't mess around. Since the company didn't have $250K lying around, Adam put his personal money into the account. Ruth called me to tell me that Cain had taken most of the money out of the bonding company account without Adam's knowledge.
I called a meeting with Cain and Ruth. I told Cain that taking out the $250K without Adam's knowledge was a significant event that I felt obligated to report to Adam. He told me he would put the money back into the account within two weeks. He did.
A month later, I got another call from Ruth. She told me Cain had again taken the $250K out of the bonding company account. I didn't know this at the time, but a snake had approached Cain with the idea of opening an apple farm. You may have heard that the snake approached Eve, but most serious Biblical scholars (including Sarah Palin) have concluded that since women were not taken seriously five thousand years ago, the snake definitely approached Cain. Of course, Cain knew nothing about growing apples. What the snake really wanted was access to the company's cash and a steady job.
This time I called Adam. Of course, he was unhappy and immediately met with Cain to review the financial status if the company. I was not invited to the meeting. As a result of the meeting, I was fired as CPA, and Ruth was fired as bookkeeper. Later Adam told me, that since he had put Cain in command, he felt obligated to let him make his own decisions.
A little over a year later, I heard from Able. He told me that the company was in bankruptcy,and that I should expect to hear from the attorneys the company had been using under Able. Of course, Cain had fired them as well. They hired me to try and determine what was left of the company's finances and to complete any unfiled tax returns.
I walked into the biggest business mess I have ever seen. Cain had taken the $250K and a lot more to invest in the apple farm with the snake. The snake didn't come alone. He brought with him a weasel as financial controller and several other vermin he placed in key management positions. The new company was a miserable failure. Taking the money out of Adam's company left it desperately short of working capital. Working capital was so scarce that the company was unable to complete Jehovah's major project. The bonding company had to step in and pay all of the unpaid subcontractors for the job as well as pay for the final completion of the job. They weren't happy people and were suing the company and Adam as the guarantor of the performance bond.
At the time the bonding company came after him, Adam's assets consisted of the $250K he had set aside in the account for the bonding company, his personal grass hut, and the grass hut he was renting to the company. Of course the $250K was long gone thanks to Cain's foray into apple farming. Adam sold the hut that served as the company's office space, but that wasn't enough to repay the bonding company. He was forced to move out of his home and move he and his wife into a small rented apartment. Even that wasn't enough to satisfy his obligation to the bond company. He filed for bankruptcy. At age eighty, he was financially ruined. If only he had sold the company to Cain and Able a few years earlier. He would have eliminated his personal risk.
Now you know why this story is probably the saddest series of events in my career. Of course since this is all about me, as all of you know, I still haven't recovered. What lesson can be learned from Adam's story besides never trust a snake? The obvious lesson is not to be in business with our family. That is the nominal lesson I wish to convey, but there is another lesson to be learned. When it is time to leave your business, leave your business. Adam's time in his business was past. He should have sold out to his sons. Maybe they would have succeeded together. Maybe they would have failed. I believe Able's leaving killed the business. Nonetheless, Adam could have left the business without any personal risk. In the end, he left all his chips on the table and lost his entire financial life in a business he no longer controlled. I am truly, and will always be, sorry for his loss. He deserved far better.
Thanks for reading. My search engine optimization guy has made me promise to mention the Stitely & Karstetter web site http://www.skcpas.com. We have a more informative blog there and you don't have to deal with my snarkiness (is that really a word?). Redskins fans – Aaron Rodgers was drafted immediately before Jason Campbell. Doesn't it make you want to vomit? I am headed to the bathroom now.
No comments:
Post a Comment