Surviving Being Stiffed

      A cabinetmaker mulls over whether to throw in the towel, after two big clients fail to pay. July 5, 2011

Question
Work has been slow for some time, but we have had enough to keep steady. We currently have two clients that are not paying. One of them is a commercial property; the project was completed, then the building owner refused to pay the GC. We have a lien on the property along with several other trades. While I'm sure we will see this money, I have no crystal ball to forecast when.

We have another customer who lives (at least on the exterior) very high on the hog and claims he has no money to pay. His lawyer has communicated to our lawyer that when we get a judgment in our favor, he will immediately file chapter 11. This client is also signed into his contracts with us personally. None of this seems to be enough to get an attorney to put some hurt on this guy and make something happen.

Prior to these two incidents, we had another GC file chapter 11 and we had to negotiate our final payment for the job we did. We have pretty much written off the commercial work, and now pursue the residential work, as we have always done both.

We have a monthly lease and machine payment, which have never been a problem, but most of our working capitol is tied up with these two clients. We have an emergency fund that would carry us approximately 5 months. We have been in business for 13 years and have grown slowly and built a great reputation.

How do you know when it's time to throw in the towel? This seems like the worst thing to do, as we would still have the machine payment with the used market being what it is, and trying to find/start a new career in these times seems extremely difficult.

I don't know if I want to go through the emergency funds, if we will be in the same boat when the funds are gone. It doesn't seem right to throw away 13 years because a couple of jackasses won't pay, but going forward seems like a very tough battle given the current conditions. There is always a lot of sound advice given here, so thanks in advance for any input.

Forum Responses
(Business and Management Forum)
From contributor J:
I have been doing this for 35 years and this is the worst I have ever seen. My financial adviser sent me a column stating that with the present and future foreclosures, the economy will take 107 months to deplete the inventory of existing houses. Different regions of the country will recover at their own pace, but I believe we are in for many lean years. Look at your situation and decide if you can make more doing something else. If not, close down and declare bankruptcy and send the machines back. If you had to personally guarantee the leases on the equipment, consult an attorney. Try the attorney that is handling the account where you are trying to collect where your customer personally signed. I am in a much better situation than you are, but I am considering closing also. It seems that I am working to pay the insurance and tax people. Best of luck.



From contributor M:
It would help to know your annual gross sales and the amount these two clients owe you. If their debt to you represents more than 6 months gross, I would say you are in trouble. If it is only 1 month, I say put these problems on the back burner and move forward.

One option is to push the pause button on your shop. Lay off all the workers and minimize overhead while waiting for the money to show up. Sounds like this plan will not work for you because if you have machine payments, your overhead likely will not lower enough to matter.

Is there more than you are telling us? Two slow/non-paying clients should not be enough to kill your shop if you are getting by otherwise.

12 years is a long time to be a small business owner. It is a tough, lonely job. I was worn out after just 5 years. I realized that I am a great carpenter and very good at setting up production systems, but a horrible businessman. I had to make changes to my business that involved me giving up control of the aspects I was not doing well in.

If you are feeling beat down, it is time to evaluate everything. It sounds like your business is in good shape. You have not been in the red and you have a good cushion if things get worse. So look at what is bothering you and make changes to resolve your conflict.



From contributor Z:
We have been in this spot before (with churches no less). We tell them, after several letters and phone calls, that if they refuse to pay, we will, on a certain date, come and get our product. It is not theirs due to lack of payment. You may see how fast you see the money. Note of caution - make sure you are willing to back up your words with actions.


From the original questioner:
I do not believe there is more to this story. The amounts owed are approximately 5 months gross. We have not been immune to the economic slowdown - things have been slow in the residential market. And not really wanting to throw my hat in the commercial arena anymore due to the large amount of non-payers combined with a substantial dollar figure in unpaid invoices, this does not leave a lot of wiggle room right now. The holiday season is upon us, and this is always our slowest time of year.

The business has had its ups and downs over the years, but we have always been comfortable. I guess right now we are leaning towards selling off and downsizing, getting back into a comfort zone, and regrouping from there.



From contributor B:
For the commercial account, file against the bond. The commercial job should be bonded if bank money is involved. This way you will be in line to get paid, even if it takes a while.

For the residential account, sell the debt to a collection company. You may only get 25 cents on the dollar, but you will have no incurred legal fees, and something is better than nothing. Then let him deal with the collection company if he wants to go the bankruptcy route.



From contributor O:
Wow, this really sucks! I hope you get paid. Some people just don’t understand what it is to work hard for your money, so they feel justified in sticking it to you. I am also real slow, and have sunk to taking small jobs that I normally would never touch just to keep busy. It also seems like most everyone is nickel and diming me, even on stuff like shelves and touchups to others' bad workmanship. Why others feel I should repair their stuff, and except low payment to do it, is beyond me.

Hang tough - perhaps if you explain in what situation they’ve put you, it will pull on their heart strings (if they’re still attached).



From contributor E:
The pain I feel for you is strong, but the climate is not going to change much in the next few years. As much as I hate to say it I think now is the time to call it quits.

I am located in Nevada, and there have been more problems here than most areas, and this is what I have seen. The guys that were just hanging on have lost everything. The guys that threw in the towel on their own conditions seem to be fairing much better. Some guys have moth balled their shops, others have closed them down completely. I hate to see you make the decision, but I think you need to take a real hard look at where you are and where you are headed. There is no lost pride when the smartest thing is to bail. It just may be the wisest choice you can make now.

I have seen people continue to drop a ton of dough just to keep things going, and they end up losing everything they have worked hard for many years to obtain. I have promised myself that if I get into that position, I will bail. Makes no sense to work hard for nothing and take on all the liability. Sorry for the bad news.



From the original questioner:
Thanks. Believe me, these people have no hearts. The commercial property owner has an 11 million dollar place in Miami to pay for, and the other lives in the most upscale sub in our area, with all the goodies - place on the lake, BMW, Lexus, Rolex, Corvette in the 4 car garage.

I don't understand how people can justify having no money while having all the amenities, and get away with not paying their bills. I have no qualms over people being successful and having nice or expensive things, unless they acquire them by not paying me.



From contributor G:
After 7 years of commercial millwork, we did a city library project in 2006. After 4 1/2 months, the bonding company instructed the city not to pay the GC or their 8 subcontractors, issued you a letter to check your statute of limitations to file with the bonding company. 90 days here in Texas. No money. Another time, we filed a mechanic lien on a project. GC contract mentioned this project is "turnkey." GC refused to issue any change orders. They changed granite tops to plastic laminate countertops, added cabinets, requested blocking for their stone wall, all denied by us. This GC refused to settle or issue any type of payment. It will be 3 years before we go to court. Until each state passes a law to protect the commercial millwork. At present it is 0 down, wait over 90 days before your first draw. Another 10 months for your 10% retainer. Why do commercial millwork?


From contributor C:
Hanging it up is not the answer. Seeking clients that want you and your shop to solve projects that they perceive as problems, is. You need to get rid of the shit and replace them with the good. It took me a long time to realize that slow payers are bullies and cost me too much. Non-payers are a learning experience. Two clients should not break you.

It took me a long time to figure out how to change our shop from struggling and being taken advantage of to mustering up the courage to say, "Tough - no draw dollars, no cabs." But it had to be done. We have money in the bank now and payroll and taxes are easy.

I have had my fair share of shit pays and no pays, and it about broke me, but now they can't phase me. I get pissed, yes, but production and landing more work is my focus.

Look, I would highly recommend you stop any and all work immediately if you don't have a material draw. Set up a company policy - you don't need to take any more beatings. Commercial work is work and the honest GCs will give you a draw for materials and you need to continue to bill as you get through the job as progress draws.



From contributor M:
5 months gross is a tough nut to swallow. Considering what you said about your reserves, I understand better your position. You are close to a net 0 position, assuming you do not have cash flow now from new work. If the work is still there to pay the bills, then keep going.

I think there is a lesson in your story. Maybe a business needs to set a limit as to the amount they are willing to go out for an individual job. As expressed as a ratio of the out of pocket on a job and the gross income of your company, what is acceptable? It seems risking 5 months worth your gross income on a single job (or two) is putting too many eggs in one basket. As others suggested, there are ways to mitigate the risks through bonding and progressive delivery/billing. Although I know that on commercial jobs progressive delivery is generally not an option.

This is all very close to home for me. I am negotiating deals for high-rise condominium developers. They are closing on 300 units a month! I can't meet their full requirements, but they want me to supply as much as I can. This means I will have to import my own materials and hardware as well as double my staff. I will also enter the world of collecting from these large corporations. This deal would more than double my sales. If they did not pay I would be busted.

Do any of you have advice on leveraging your position to take a big job and the risks involved? Where do we draw the line on opportunity vs. risk?



From contributor K:
The limited business picture you provide is certainly not insurmountable long-term, however, the more pertinent question is, do you want to close your doors?

If you are considering this solely based on your getting hit by these two accounts, I can tell you we have all been there to one degree or another. You can overcome this and come out stronger, but you would have to first determine whether or not you want to continue. That is key.

If you ultimately decide to close the doors, do you have a plan then? Employment in place by someone else? Bridge-income between point A and point B? Able to break your shop lease and equipment lease without penalty (otherwise you become the customer you are complaining about)?

This is very important because without a solid plan, you are just trading one set of problems for another. Let us know if you want to continue but are having trouble envisioning it because of the amount of money owed by the two customers. If you do want to continue, give us an idea of your customer base, number of employees, production capabilities, etc. and we can maybe provide ideas on how you can get back on the horse.

One thing to keep in mind - you have reserves. Just think if you didn't - you are in a much better position than most, as you can start again with reserves.

Since the five months of revenue that you were screwed on most likely represents your profit from the job, as well as materials (which you may still owe on), then part of it is a write-down, and just goes to show how important profit and reserves are.



From contributor R:
Contributor C, I think it is more complicated than you make it out. Sometimes you think you have a great customer, and it's not until too late that you find out their true colors. Even the best of businessmen make this mistake multiple times in their career.

I'm afraid I agree with many of the others that it's going to be lean times for a great many years. Also, I'm afraid the moral fiber/character of our people is showing... There really are more crap customers out there. Things that don't show up and problems that don't arise when the good times are on, show up when the clamps are put on. I'm afraid we don't have the same character our earlier generations had when they met tough times. I sure hope I'm wrong, though. That combined with a legal system that borders on ridiculous and has no common sense makes it tough on the honest folks, and the slime balls too often win.

I honestly think we will come out the other side of this better people and better businesses. The problem is the next 2, 5, 10 years and whether you want to deal with them as a businessman. Because if you think this is tough, I'm afraid we haven't seen nothing yet.



From contributor K:
Contributor M,

"Do any of you have advice on leveraging your position to take a big job and the risks involved? Where do we draw the line on opportunity vs. risk?"

Your question is almost like the pre-cursor to the questioner's problem (double sales, large client - risk based).

On a project that large, you need to have definable production and payment draw points. The leverage you have is that they want you to do part of the project, so you have met their need. As much as you want this project (who wouldn't want to double their sales?), realize that if they cannot meet your need (timely payment), and it must be clearly defined in the agreement what happens if they fail to pay, whatever you determine that to be, then they may not ultimately be your client. If they are, and they don't pay and you decide that the remedy is to stop production, remember that you have hired new employees for this, and that you will have to fill that void. Make sure it is a bonded project with draws defined. Sounds like a great opportunity.



From contributor Z:
Contributor M, bill according to percentage of work completed. Use AIA documents and put a clause in your contract that if the contract is cancelled, you receive a set amount of compensation.


From contributor U:
I think you should consider all the good advice given and maybe take a day or two off and decide what it is you really want to do. Give key consideration to what you will be doing if you close shop. I have been in this situation, actually twice over the last 20 years. I even decided on one occasion to get out of this business. I found out that the spark that drives me to stay in this line of work wasn't dead yet. I realized that I needed to make some serious changes about how I was conducting business. After making these changes, I have been glad I kept on operating, even through this economic slump that we are all dealing with. The truth is, if I had not made the changes, we would not have survived until this time. Good luck on making the right decision.


From contributor N:
Seems like folks want us to finance their projects. Well, the financiers typically charge an interest fee. So perhaps using more of a firm business policy on interest. Have a bond or deposit in place in a bank that guarantees payments on completion dates like a construction loan. This way you know the money is there. Whenever we do something different than normal, it may cost us something.


From contributor M:
Contributor K, that is my point. I know I am looking at a sizable risk. 70% of my work is wholesale with all money paid before the work leaves the shop. I am doing business in a third world country where people can really screw you and the courts are not very helpful, unless you are well connected.

I am looking for someone with experience in these kinds of deals to help me with the contracts. But that is easier said than done. For better or worse the best thing you can do is stay friends with the people writing the checks. That is everything here. It sounds bad but it is not as bad as it sounds. Mostly involves drinking a lot of beer and eating a lot of food.

I am looking at getting a loan to cover the expenses and materials for the first phase of the project. This will make the immediate out of pocket exposure not as bad. But I will have to add interest payments to my job overhead.

I do not know a lot about bonds. So far the bonds I have been involved with were in the other direction. I put up a performance bond. And I am not familiar with the AIA. The legal system here is identical to the USA so my old contracts were easy to modify for use here. I think the same would apply to the commercial contracts.



From the original questioner:
Thanks to all for responding. I do not believe I want to close the doors. In 13 years this is certainly not the first time we have been bitten, however it is the combined largest, and with the timing, it seems to be growing into the perfect storm.

As for having an escape plan, I do not, but I also don't think someone should sink with the ship instead of letting go just because there is not a rescue ship sitting right there to pick them up.

We are a 4 man shop with CNC, bander, slider, finish room/booth, and all the usual - widebelt, shapers, planers, hinge machines, etc. We occupy approximately 9000 sf of manufacturing space with a 2500 sf showroom.

As far as breaking leases, while not impossible, it would be painful. However, I am one who always pays his dues, and skipping out on my obligations is not an option regardless of the company surviving or not.

Our customer base is/was approximately 70% commercial, 30% residential. Very few builders on the residential side - mainly deal directly with the homeowner.

Again, I feel as though I want to keep the company going, but it is a tough, lonely job. It is difficult at times to not be beat down and exhausted from the constant barrage of demands/lack of consideration and professionalism and scumbags that seem to be in the majority right now.

This is not to say that we don't also have some of the greatest customers one could ask for, because we do, and the photo albums full of letters thanking us for the wonderful work speak volumes.

We do get draws on all projects, commercial or residential. On the residential side this is never a problem. On the commercial side, if they don't give draws, we bow out of the project. But when you get to the final draw and they don't hold up their end of the bargain, even having the cases in your shop is not really any better than if they were installed, from an economic viewpoint, other than the install labor savings. All the work and materials are still sitting there.

Again, I thank all of you for taking the time to respond. Reading the posts has given me pause to see where I am and what I am going to do. If you have any thoughts on how best to get down that road, I am all ears.



From contributor P:
I know the feeling. My advice would be to not let it rent space in your head... I know much easier said than done. It seems that you have to have somewhere to go before you can decide anything? Retire, downsize, promote, get a job, partner up, what? Hanging it up without a goal/plan is not an option. If you don't plan for a future, no matter what it is, you will not have a future.


From contributor L:
Using a collection agency may help you out right now. I have used them in the past, and although the percentage collected is low, it's not just about the dollars. You will feel empowered again if you use someone to fight your fight for the money. It will lessen your time thinking about it and possibly help you focus on better things.

It sounds like you have had a decent business, and at the same time are on the fence about whether or not you have it in you to continue the fight. If you think you want to keep fighting, try getting some help like the collection agency.



From contributor I:
I have read your original post and wanted to respond with a "don't hang it up - you've got a good reputation that shouldn't be wasted" message, but others have done that.

I am not sure what you mean by "...how best to get down that road." Can you explain? The road to clearing the debt? How to deal with the impending collection calls?



From the original questioner:
I guess it was in reference to contributor K's post of "give us some background and maybe we can provide ideas on how to get back on the horse." There are no impending collection calls.


From contributor K:
I am wondering at this point if we can actually help you. What I mean is... You already know how to generate business, so it seems you need to tweak how to structure commercial business so that you aren't left in the lurch. With 70% of your business being commercial, and I am assuming these two accounts represented a large portion of that 70%, you now also need to replace the customer.

With your residential business not being a problem with collecting payment, if you are not able to tweak your payment structure to minimize or eliminate the risk on the commercial side, maybe a focus on the residential side of your business is in order. Quicker access to revenue and turnaround, which is important in your situation.

From what you've been posting, I think you are experiencing a crisis of confidence due to this large write-down. That can take the wind out of anyone's sails. But I think you need to focus on the positives in your situation. You have the reserves, you have the machinery, you have the reputation, you have the experience, you have the hard lesson of leaving too much on the table in your payment structure regarding commercial business behind you, you have a large shop and showroom (excellent tools to leverage and maximize), etc.

Until you have the commercial side producing the business that is structured the way you want it to be structured, massage, milk and focus on the residential side. Get on the horn to local contractors/small shops and keep your CNC humming by offering panel processing and work they have to farm out that they don't do anyway. Get a piece of the business they have already signed. And the best part is, it is cash and carry. Become their manufacturer, and private label a line for them.

I could go on, but you've already settled whether or not you want to continue. After 13 years of being in business, you already know what to do and what to charge as you not only were able to generate a profit, but reserves, and you grew your business to the point of supporting a 9000 sf shop, machinery, 2500 sf showroom and employing four employees, so you are already ahead of most of your competition.

In the short term, can you do what you do in a smaller footprint and claw back some of that lease payment or speak with your landlord and get a reduction in your lease? Four guys in a 9000 sf shop with a 2500 sf showroom is a lot of space to fill. If this is a lease, my guess is this space is a package deal, so downsizing the shop may not be an option. But I can tell you with a 2500 sf showroom, you could easily switch the ratio of commercial/residential.

The difficult times are just a fact of being in business, but the more you adjust over the years to these factors, the more you know what to look for in those storms and how best to navigate through them.

When you make it through this challenge and come out on the other side, just remember, although it may take a few years, better times (what we are used to) are ahead, and you will be in the position of being supercharged to take advantage of it. You will also benefit from the fact that a lot of shops are closing because they didn't have reserves and have already exhausted their resources. That will speak volumes to future customers of your stability and value as a company.

With regard to the outstanding balances from these two customers, go after all avenues (liens, lawsuit, factoring company, etc.), and once you have done all you can do, it is out of your control, and what will happen will happen. So let the process unfold and focus on the future. Operate on the basis that the money is not part of your operating budget, and any money that comes in from these two customers, put right back in reserves.

From what you've posted, I believe you had the wind knocked out of you, but you are far from being knocked out. It all depends on you and how hard you want to fight for it.

From what you've posted thus far, now is not the time for you to hang it up, but you need to make that decision. Once you do, take action on either course. You've done a lot in 13 short years, and you can most likely do a lot more, but you need to keep your head focused on the things that keep building your business, and not focus on the things that can drag down your business. Hope it gets your creative juices going.

"Whether you think you can or you think you can't... You're right!" - Henry Ford



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