As a result of those constant questions, I have formulated what I call the “Five Rules for Every Privately Held Business.”
1. Never let your company pay your personal expenses.
Many privately held companies pay personal expenses, including utility bills, family member insurance, and Subchapter S taxes on behalf of the major shareholders. While this practice is neither illegal nor immoral if fully disclosed and appropriately approved, it can create personal liability for the shareholder/owner. In the event of a minority shareholder suit or a corporate bankruptcy, any expenses paid for and on behalf of a shareholder (even if documented and approved) can be recovered from the shareholder/owner. If you need this type of financial assistance, take it as salary or a dividend. Pay the taxes on the income and sleep soundly at night.
2. Never assume hired professionals will still be standing next to you if and when a crisis occurs.
Your law firm, accounting firm, and investment banker are all nice people, and they all have contributed to your success. But at the end of the day, they have families to feed and their own businesses to protect. If they have to make choices between standing with you during a time of controversy or protecting their own reputations and future businesses—they will make the decisions that are in their best interests.
You are paying these people to perform services, and you have a right to expect that they will deliver those services. You are not paying them to risk their careers or their futures—so do not expect that they will deliver those services.
To be a successful businessperson, you need to be an optimist. As an optimist, we always think our businesses will last forever or that we’ll be able to successfully deal with new challenges as they arise.
The bankruptcy courts are full of proof to the contrary.
Diversify your personal financial holdings beyond your primary business. Create assets that are “bankruptcy remote” and “judgment proof” to provide for your family in case of unforeseen catastrophe.
4. Never surrender the high ground.
Every successful businessperson understands the “moral” high ground of ethics and integrity and knows that these principles can never be compromised. On rare occasions, we are confronted with opportunities to surrender the “physical” high ground. During periods of controversy or crisis there is an inclination to abdicate responsibility or to “step away,” “step down,” or even resign, pending a full inquiry. To do so is tantamount to surrendering the “physical high ground.”
No more than you would ever compromise the moral high ground should you ever compromise the physical high ground. It is a lot easier to defend from inside than it is from the outside.
5. Hire a business analyst—before the crisis.
Virtually every business with whom I have consulted had a staff of inside and outside people who dealt with things “after” they happened. Rarely have I found a company that employed a professional to review the business and the business’s practices to identify and avoid future potential calamities.
Ben Franklin once said, “An ounce of prevention is worth a pound of cure.” He was right!
