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When the Sheriff Shows Up at Your Door

As I read an article entitled The Tax Man Seized My Business in the April, 2008 issue of Inc. Magazine, I am reminded of a similar incident my business went through.

We had just recently completed the construction of our new office, a veterinary clinic to be exact as well as the installation of operatory equipment needed to perform procedures and take x-rays. Without this equipment we could not treat our patients, which meant there would be no revenue which meant we could not pay our bills.

We had hired a real estate consultant to manage the project and assist us with providing an estimate of the total cost of the project. The real estate consultant had referred a general contractor to us whom he was familiar with to provide the estimate. This estimate was going to be submitted to our lenders whom we already had an ongoing business relationship. The general contractor estimated that it would cost approximately $150,000 to construct the 3000 sq. ft. office which was located in a gutted out retail plaza. To equip the office would cost another $85,000. We submitted a request in the amount of $235,000 to our lenders and were approved. Negotiating with two separate lenders, one to finance the construction and the other to finance the equipment would prove to be a key decision as I will explain later.

In the meantime our real estate consultant interviewed three other general contractors and invited them to submit bids for the project. What we were told next was nothing short of a rude awakening. The three additional bids were all at least $265,000 for the construction of the clinic alone and did not include the cost of the equipment. Construction of the clinic without the equipment was useless. We asked our consultant why there was such a huge disparity from the original estimate? He informed us that general contractor that he recommended had significantly underestimated the cost of the build out and realizing their mistake quickly withdrew their bid. A week later we fired our real estate consultant.

We contacted our lenders and informed them what had just transpired and requested additional funds in the amount of $115,000. Unfortunately our lenders would not approve us for any additional funds as they were concerned that we would be overleveraged and would not be able to meet our monthly debt service payments. We contacted several other lenders and were also denied. We faced a very difficult situation knowing that we were going to be short $115,000. Construction had already begun and pulling the plug on the project was not an option as we had to be out of our original location by a certain date due to the demolition of the building (the landlord had sold the building and surrounding land to developers). We also could not afford an interruption with the business meaning as we moved out from our original location on a late Friday afternoon we had to be up and running in the new location by the following Monday morning. Continued cash flow from one location to the other was a must in order for the transition to succeed.

Our only option was to proceed with the project. To decrease the amount that was still needed we contributed all of our savings in the amount of $50,000. This reduced the shortfall to $65,000. We were banking on the cash flow generated by the business to make up for the difference and were predicting an immediate increase in monthly revenues by 40%. Our growth rate for the last 3 years was 20-25%. We also negotiated delaying payments to other vendors. To be honest, we were operating on a whim and did not really know what to expect. You just had to put your best effort forward and deal with the issues as they arose.

Despite our efforts, the strategy did not work as the note which financed the equipment went into default six months into the agreement. A year and six months later, our equipment lender filed suit against us for non-payment. As it turns out we were fortunate to have negotiated two separate loan agreements with two different lenders otherwise a single lender would have started to foreclose on the entire business.

We quickly handed over the matter to our attorney and after 4 months were able to negotiate a settlement which included a monthly payout secured by a judgment. It was only after this agreement that we truly understood the financial health of the business. After only four monthly payments we went into default again as we were still struggling to get our expenses under control. Despite the set-back we remained focused on a solution to this matter and trusted that our lawyer could negotiate another agreement. This is where I discovered that having a strong and experienced attorney really counts especially when you really have your back against the wall. One of our biggest allies was time simply because the more time we had the better we were able to find solutions to control our expenses and cash flow. Our attorney was able to delay proceedings for months giving us valuable time to fix our problems and continue to grow the revenues. Another reason why you should have a good attorney is when unexpected surprises comes knocking at your door-literally.

After not hearing anything from the plaintiff for 3 months, they decided to get aggressive with us and proceeded with a writ of execution. Basically, the sheriff showed up at our door ready to repossess our equipment. Now when the sheriff shows up at your door unannounced, your employees start to wonder what is going on as well as your clients. You also start to develop a sense of hopelessness and discouragement because you feel that you are now really out of options. No more negotiations and no more stalling. Actually, you do have one more option, call your lawyer immediately which is what we did.

Our lawyer quickly drove to our place of business talking on her cell phone as she tried to negotiate with the plaintiff's attorneys. At the same time she was questioning the sheriff on the validity of what exactly he could repossess if anything. I am thinking, wow the sheriff is standing right here in front of me and my lawyer is telling him that he may not be able to take much. Trying to avoid getting into a legal ramble with my lawyer the sheriff stated that unless we give him $65,000 he would start taking equipment with a value totaling at least $65,000. Our lawyer quickly strategized as a stall tactic that if he took action he must only take equipment where the lender had a first lien position and could not take equipment in which another lender had a first lien position. Doing so would result in legal action against the plaintiff. Our lawyer used this line of reasoning against the plaintiff's lawyer and stressed the weak financial position of our business. Funds were limited and if the sheriff took the equipment a moving company would be hired and we would be stuck with the bill. Our lawyer posed the question to the plaintiff's lawyer, "do you want what limited funds my client has to go to a moving company or do you want it to go to your client"?

At this point my feelings of hopelessness and discouragement started to wane and I actually started to feel even confident that we may again dodge another bullet. Sensing that the plaintiff's lawyer may cave in, the sheriff approached me directly and asked me to show him where the equipment was located. In his mind he did not think that my lawyer was going to have any last minute success. In any case the sheriffs demand to show him the equipment was like a state trooper requesting to see your driver's license after he has pulled you over for speeding. You just do it. To my own surprise, I looked at the sheriff, paused for a few seconds and firmly replied "wait". I wasn't too sure how the sheriff would react to my answer if anything I was expecting him to be mad. As it turns out I did not have to find out as my lawyer was able to negotiate a last minute agreement which entailed an immediate payment of $2000 and re-instatement of our original agreement. Just 6 months later we paid off the entire balance.

In writing about this experience, the main point I want to make is that it is very important to develop a relationship with an attorney early on in your entrepreneurial career. As I read the article in Inc. Magazine, a comment was made by a reader stating that the owner of the ice cream shop could have avoided temporary seizure of his business by the state by hiring a good experienced attorney. The ice cream shop owner had hired his CPA and then proceeded to represent himself along with his partner. Hiring an attorney would have allowed him to continue operating his business saving him thousands of dollars in lost revenue.

Even in the most dire of situations, you can still avoid a major setback by partnering with the right people. Form a relationship with an attorney early on in your career and plan ahead. As soon as you feel (not when you know) that a potential legal problem will arise inform your attorney as she may be able to prevent the problem from escalating into something bigger and more expensive. As entrepreneurs we should focus our time energy and resources on what we do best, running and growing our companies. However problems, disputes and legal issues will always arise and when they do simply let your lawyer handle the issue. Doing so will help you keep your focus as well as your morale and enthusiasm. Yes you will incur legal expenses but in the end, the expense of your lawyer will be much less compared to the lost revenue and time if you handle the issue yourself.