Not too long ago, one of our clients placed a claim with us against one of their long time customers.
In reviewing the documentation and speaking with the credit manager about their business relationship, he felt terrible about the claim they had against this customer. With so many profitable years of business together, he never imagined that a gradual change in the regime would have some day resulted in the account becoming seriously past due.
In short, after the owner’s two sons took over the business a few years ago, things began to change as follows:
- Attempting to grow too fast in which a very large expansion of the debtor’s manufacturing plant was undertaken but not completed.
- Core employees were let go who helped build the business and knew the fine details.
- The Proven Ways went out and the new “consultants” were brought in, who were not experienced in the industry.
- Miscommunication and misunderstandings regarding orders placed were increasing on a more frequent basis.
- The Tenor of the business style was changing from one of “we are a team together” to “we are the customer and you’re our supplier.”
In essence, it appeared that the sons were mismanaging the business and not adhering to the formula for success that made the company a great one in the first place. But the real shock to the credit manager was when he finally decided to run a credit report on this long term customer after so many years of never questioning their credit worthiness.
Upon reading through the report, the credit manager was shocked to see there was a lawsuit filed against his customer claiming millions of dollars in damages related to intellectual property infringement. Whether the suit was with merit or not, it had been filed two years ago at a time which would have given the credit manager a significant heads up that the new regime was heading into trouble.
In talking with my client about the regime change, we uncovered several issues that were either preventing or even paralyzing him from recognizing the seriousness of the warning signs.
- Like a parent whose child is always good and has never does anything wrong, it was emotionally very hard for my client to accept the idea that their “good as gold” customer was now having payment issues.
- Since the warning signs appeared gradually, the long term impact of each one was not collectively realized.
- Although payments kept coming in on time for quite a while, there were mistakes and oversights that when questioned, the responses easily persuaded my client to accept them. For example, checks came in:
- without a signature that had to be sent back;
- for newer invoices while older invoices were missed;
- with amounts seemingly arbitrarily different than the amounts on the invoices being paid.
- As the relationship was so positive and profitable for many years, my client became complacent about going out and getting new business. In addition, this lack of replacement business resulted in my client not wanting to rock the boat with the younger regime for fear of losing them.
Although we would like to enjoy a wonderful customer for as long as we are in business, the reality is that very few companies are built to last. Whether it’s a regime change from one generation to the next or any other kind of subtle or sudden transition, we’ve seen time after time that even after decades of profitable business, any company could lose their fizzle and end up going bankrupt.
Regardless of how long term and beautiful you believe the relationship with your very profitable customer is, remember to:
- periodically take out a credit report to see if there are any lawsuits, judgments, or other red flags;
- review your payment terms and any other conditions with your customer when payment irregularities begin to make you uncomfortable;
- evaluate the quality of your communication with the new management / owners to ascertain the viability of your ongoing business relationship; and
- implement the credit changes that will correspond to the tenor of the relationship.