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Business Failure: Why my First Recruitment Agency Failed

August 29, 2020 / Comments (2)

Business-Failure

My first attempt at learning in the business world was more like getting an MBA…only the wrong way round and certainly not from the established schools such as Harvard or Oxford.

I was twenty-six at the time and I was facing the harsh reality of business failure, having been part of a multi-million dollar company in the IT staffing and recruiting services industry.

There were five directors of the company (officers in the US) and to say we were top-heavy was an understatement!

We had a chairman, CEO, two managing directors, and a sales director — we all really did love a title and in reality, it was five egos, all battling for power in a company and at the end of a decade fuelled by image, power, and debt.

Welcome to the “Power 1980s.”

And recruiting or staffing services, whatever you want to call it was a “power business” — one where you could enter without any experience, work hard and reap the rewards for success.

And the rewards were huge.

The movie Wall Street with Michael Douglas, summed up the decade and the recruitment industry operated in the same manner, as far as how you generated your business.

I am going to share my story with you here as to why my business failed and in the hope that it will motivate you not to do the things I did!

But here are a couple of points I would like to make first:

Firstly, many of the mistakes, I and my business partners could have been avoided, but we were fuelled by an overwhelming entrepreneurial spirit that in our own minds was unstoppable…but our industry was sliding into a deep recession and that resulted in a contraction of credit that ultimately placed a stranglehold around the business and ourselves.

We were totally debt-funded and had no cash reserves, plus we were all self-made, but that doesn’t excuse inexperience and naivety.

And secondly, there seems to be an obsession in today’s business world of doing things “differently” and to forget the old way of working and look at the “new ways.”

This for me is a huge mistake that so many entrepreneurs make and a trap they fall into — the purpose of business is to create or purchase products or services to make a product that you will ultimately sell to customers for a profit.

And the fastest route to that success is for the business owners to connect directly with decision-makers in their target customers…and at the highest ownership and executive levels.

This has never changed in the history of business and never will.

How it is done, however, may change but remember that when it comes to technology, for example, it is an enabler…a gateway drug to that connection and it should never be the primary driver unless it performs in line with my statement above.

In fact, in the early 2000s, I co-founded a very advanced software and services company for the mobile industry…and I became too obsessed with the fact that it was a tech business, rather than stick to what I knew had always worked for me before.

The business never reached its full potential.

Failure is part of the learning process, but you don’t have to go to the extremes of learning that I went through…just recognize the signs early and act quickly to prevent disaster.

To the story…

Business failure – the end of the ego

 

Business-Failure-Ego

 

It was mid-week on a bleak winter evening in 1991 and we had battled for over a year to save our company and out of the original five founders, there were only two of us left.

I later read in a book much later, that around the same time, Donald Trump was invited to attend a dinner and refused to go because he would be in the company of the bankers who were about to pull the plug on his empire.

I think his wife urged him to go and walking down the street to the dinner (he couldn’t afford the usual limo if I remember rightly), he passed a tramp in the street and told his wife that the tramp had more money than him.

At the dinner, he sat next to one of the bankers who he did not get on with and was convinced he would initiate the action to end his empire…but he managed to discuss the basis of a restructuring deal at the dinner and eventually won over the banks.

We had managed to build a business that had fantastic top-line revenue but failed to make a profit…and this part of the story will explain why.

Aside from our love of business titles, we had an equal love of nice clothes and fast cars — my 1989 Porsche 911 turbo was costing me more money per month than my two-bedroom London apartment, and my business partner was driving a brand new BMW M5!

We still had the other cars left from the founders that had left — three BMWs and a few others that we had purchased for key members of staff…and on that bleak winters evening, there was a transporter due to re-possess them all!

I wanted to hide in the basement of the building.

But my business partner had other ideas — there was a bar that had opened just off the high street in the town and it was our frequent watering hole.

Most evenings we were in there after work for a couple of drinks, unless it was a Thursday or Friday when it was a lot more…but on each day we would park our cars in the spaces outside and it looked like a car fleet of the rich and famous.

Only we were neither!

On the evening of repossession, my partner got everyone in the company to drive their cars over to the bar and park them outside and starting with the two of us.

I was absolutely horrified and refused — my partner simply told me that we had tried our best, we put everything into saving the business (we had found new backers, but we were both reduced to salespeople with share incentives) and it was time to start again.

“Nobody can take away what is between your ears.”

I reluctantly agreed and now it was time to face total embarrassment — nobody in the bar or town knew we had run out of time and money and believed we were one of the towns most successful companies, but now they were going to watch a transporter arrive (we left one member of staff to stay back at the office to direct it) and load up our fleet of cars.

In the bar, my partner ordered a few bottles of champagne and invited everyone we knew, including the bar manager to join us and watch the car fleet that had graced the outside of their premises for two years to disappear on the transporter.

I gradually came round and in the end, enjoyed telling the story and it was almost therapeutic to get it all out in the open.

We enjoyed a few drinks that evening paid for by what was left on our credit cards and the bar manager thanked us for our business over the years and bought us some more champagne.

That was a great lesson in how to lose your ego — the fast-track way!

Business failure 101 — due-diligence

 

Business-Failure-Due-Diligence

 

I actually joined the business as a recruitment consultant, with another colleague after leaving another agency.

The previous agency was a fantastic one — it had a strong sales culture and I loved it until they decided to centralize operations from a series of locations around London and the suburbs (where I was working) to one large office in London and that for me and my colleague, meant a difficult commute.

After doing this for a few months, we had both had enough and found an agency in our home town that we ended up working for as consultants and later, sales managers.

The company was vastly different from our previous one and tried to portray itself as a true consultancy, rather than a fast-paced sales organization — the one we were both used to.

After a meeting with the owners one evening, I told them of my frustrations and that I could do much better…to cut a long story short, they gave me and my colleague a chance to put a business plan together to run the company, form a sales perspective.

It was accepted and we were now heading the sales operation…only with no staff!

Everyone started to leave or were fired after they heard the news in the spring of 1988 and we had twelve immaculate desks, in an immaculate office, with only two people occupying the sales floor — us.

I now started a recruiting campaign and it started with a colleague at our last agency and the rest was made up of pure trainees.

By the end of 1988, we had filled up all twelve desks and managed to build a small but solid foundation of recurring sales, thanks to our focus on the contract or temporary side of the business, and then came the crunch…

The existing owners could not pay our sales bonuses — we had worked on a flat salary from March that year and negotiated a bonus based on top-line sales growth in line with margins.

The two owners of the business had also gone into different ventures of their own, as well as running the agency and it was clear that their relationship was strained.

At the Christmas party in 1988, we were offered the chance to buy into the existing business and receive shares.

The sum at the time was a small fortune to us all — myself and my two colleagues did not have any cash and we had to borrow all of it.

The two existing owners were putting in the goodwill of the business and we were all set.

From our side, we had legal representation to create a shareholders agreement, but we did not carry out any financial due diligence on the existing company, which was operating as a partnership.

We formed a new company with limited liability and inherited both the assets and liabilities of the existing partnership, which was a huge mistake.

I cannot blame the previous owners, because they were being candid with us all, explaining that they were running at a loss, despite our sales efforts and they had no management accounts available at the time — they would be preparing them toward the middle of the next year and they didn’t want to incur the expense right now.

I and my colleagues should have incurred that expense right there and then and things would have been different.

I had nothing against the owners, but their partnership was fragmented and we would be responsible for the running of the new business, with no obligation for either of them to contribute.

In reality, we were all young, vastly inexperienced, and way, way out of our depth.

We invested and collectively, we owned fifty percent of the company, with the two original owners owning the remainder.

The road to failure

 

Business-Failure-Journey

 

With our newfound framework for success, we were off and running in January of 1989.

We were motivated, excited, and ready to grow our agency into the biggest and the best…at least in our own minds.

The two former owners were happy in their new lives, as they were free to run their own businesses and we relished the fact that we were now controlling our own destiny and doing what we do best — growing sales.

Our hiring and training process was constant — we took people from varying backgrounds, personal trainers, city traders, shop assistants, market traders and put them through a training program that would turn them into fantastic recruiters.

It worked and also shaped my overall thinking about salespeople and how you train them.

I always got the best results by training people from scratch.

A lot of these people had possessed raw talent and some were extremely raw and required a lot of “polishing.”

I had studied martial arts and boxing since the age of seventeen and I had also looked outside of the business world for inspiration.

Martial arts were responsible for bringing me out of the shyness and fear I had experienced as a schoolboy and I had always wanted to learn self-defense as I was bullied at school, which also knocked what little confidence I had right out of the window.

My instructor was able to see beyond the fear and shyness and pushed me to develop the skills that would eventually see me go on to compete and gain the confidence to start a business.

I was also hungry for knowledge…and for any knowledge, I could acquire and that led me to the video below, from one of the worlds greatest boxing trainers and to some a great philosopher as well:

 

As I said, was looking for raw talent, people that had the hunger, the drive, and determination to see things through to the bitter end, no matter what.

Unfortunately, I hadn’t worked out the “character” part at this stage, but I certainly took a few sparks and turned them into raging infernos.

Also, the process took time and at least three months to make a dent in a blank sales report…but it was a much more solid way of building and running a team…it was far more dependable.

By the end of 1989, we had a full team of fully trained salespeople, who were ready to take on the world in the new era of the 1990s…at least that’s what we told ourselves at the lavish Christmas party to mark the end of the 1980s.

After the usual celebrations, we were ready for the new decade and although we had fully trained salespeople, they still had to reach their sales targets…and consistently maintain them.

Plus, we had incurred losses throughout their training and from increasing our expenses by paying ourselves large salaries, leasing expensive cars, and enjoying the benefits of each having a lavish expense account.

We believed that in time, we could increase sales to the point that it wouldn’t matter.

Time was, however, running out rapidly.

We hired a new financial controller, to bring our finance function in-house — we were growing rapidly and we needed information fast.

It was discovered that we were only paying assessments of our government taxation requirements, which involves payroll and sales taxes each quarter, back at that time.

If we failed to provide a payment to the government on-time, then it was customary for the government to assess your liability and you could pay this amount, but only for a limited period, after which they would send an investigator to your premises to conduct an audit.

We were way outside of this period and now faced an audit in the “immediate future,” as the words read on the letter we received.

Luckily for us, this amounted to another three months, which gave us time to prepare documentation and get our own independent advice on matters beforehand.

Our sales were growing nicely and we were hitting our gross profit targets, but our expenses were way out of line.

We were a growing business and the last thing we needed was fast cars and high salaries — we should have remained incentivized by performance and driven the cheapest cars possible and plowing any surplus cash back into the business to repay historical debts and to cover the differences between our government taxation assessments and the real value of the debt.

Those were the words of our independent advisor, who we had hired to take a look at our financial situation.

But in our wisdom, we believed we could trade out of our position by simply going all out on sales.

We were wrong.

After our audit from the government inspector that visited out premises, our true liability totaled 150K!

And they wanted it quick.

To cut a long story short, one of the original owners of the business, had a very wealthy friend in the US, who agreed to lend us the 150K on the security of a hotel, that the owner had recently purchased.

It was the 1980s and the property market was booming.

The money cleared the debt but didn’t solve the problem of the fact we were simply not profitable and the interest rate we were paying for the money was almost forty percent!

We all agreed to cut salaries completely and live on our credit cards, but it was too little and far too late.

Eventually, our bank decided they wanted to call a meeting to discuss why we had not reduced our overdraft, our losses were mounting despite the increase in sales.

We also hadn’t addressed one of the most critical components of running a business — credit management.

Our clients were large companies and many were household names…but we simply couldn’t collect the cash we were owed quickly enough and coupled with a business that was not making sales fast enough, it was a recipe for disaster.

Otherwise, things were OK!

Our Christmas party of 1990 was held at the hotel that my now only business partner owned and it involved fish and chips from the local fish restaurant a few doors up the street.

There were only two partners left by now — the others saw sense and quit.

We battled on, but now we were in a totally different territory…and uncharted as far as our experience and capabilities were concerned.

Rescue

 

Business-Failure-Learning

 

“Don’t worry boys, as one door shuts, another one slams in your face.”

“Just remember guys… one-minute hunky-dory and next life support machine.”

The last statement was from a favorite waiter in our favorite Chinese restaurant on the South coast of England.

We were having our usual “conceptualizing” sessions and everything was about creating the next concept.

Before his motivational masterpiece, he had asked us if we could lend him a fair sum of money, to which we explained our current financial predicament.

We were running out of cash and credit fast — the two go hand in hand when you are not making profits and we had long stopped drawing salaries.

Our strategy was to find investors who could come in and take over the business, pretty much as I did with my original two colleagues at the beginning.

And we had no shortage of takers for the opportunity, only they had different ideas as to how they would invest their hard-earned cash and were in no way as considerate as I and my colleagues were, just two years earlier.

They were real businessmen who had been through the mill themselves and were not going to get bitten again, although it didn’t stop us from trying.

The crux of the matter was that we had built up some serious revenues and with some extremely large and valuable clients, but we had overspent and their solution was simple:

We liquidate our company to remove the debt and they will buy the assets from the liquidator or receiver.

This was the dark side of the business world and one where you can easily fall foul of if you are not careful.

Luckily we had some good advisors around us and the process was painful, but not fatal.

Our lawyer had introduced us to a specialist firm of accountants that would handle the entire process.

We had three investors that were prepared to follow this option and the process involved each of the parties submitting three sealed bids to the receiver, who would then take the one that was in the best interests of the creditors.

It is not uncommon for directors/officers of companies who go into receivership to be disqualified from being a director of another company for a period after the initial liquidation, but in our case, this was not an issue given the fact we had incurred substantial borrowings at an extremely high rate of interest, to pay back our debt to the government.

We did not benefit in any way from the process and personally, we both came to an arrangement with our personal creditors to repay a portion of the total debt over the next three years and out of the income from our new employment.

Our new investors had provided us a lifeline and one with a huge incentive, should we be able to meet the terms and conditions of the deal.

We would be paid a small, but fair salary, plus a small equity stake, to manage the sales function of the business, while they ran the business and operational side.

Should we hit agreed profits after tax, we would receive a much larger share of the equity.

Unfortunately, I was not around to see this play out as the result was that there were two people for one role and my former business partner persuaded the investors that he was the one for that role.

I was now out on my own, having been bought out for enough money to see me through the next three or so months and I was off to pastures new.

The company eventually floated on the London stock exchange with my former partner making a cool 18 million, with another 10 million in shares as a cushion — this would eventually allow him to buy a well-know London football club.

You can’t win them all!

Related: “How I started my first business from a living room in London.”

Lessons learned

I opened with the statement that my first experience of learning in the business world was like getting an MBA in reverse and it is correct.

There are so many positive experiences that I gained out of the entire experience and I am going to list them for you:

  • Humility — having your ego shattered is not what you want to happen and when someone says to “lose your ego,” you have to ask them politely as to “how.?” It is not an easy process and whether we like it or not, we all have one. For me, the car repossession experience brought me crashing down to earth and I could have run away from the town and started again, rather than face the embarrassment…but it built my character.
  • Resilience — I learned to survive in a very rough sea and it gave me a new framework from which to operate my life, which would go on to help me again multiple times in my career.
  • Determination — the whole experienced only re-enforced my already high-levels of determination and this is a key quality of entrepreneurship and business.
  • I learned about the dark side of the business world — going through company insolvency and facing personal bankruptcy is a daunting prospect and the flip side to business success. I gained invaluable experience in this side of the business world and whilst there are many sharks operating in this sea, there are some very good people.
  • Risk management — when you have experienced the adversity, you are able to more easily see the signs long before the actual event.
  • Respect — I learned to respect failure and the fact it can happen at any time.
  • Creativity — it’s amazing what ideas emerge out of troubled times to help you solve your problems.
  • Opportunity — another outcome of failure and I uncovered many other opportunities during the period.

There is one overall quality that stands out and that is experience.

The whole process was invaluable to the rest of my business career and little did I know at that time, but just ten years later, I had to put all of these qualities (and a few more), to the test again!

Failure is a necessary part of learning and although the period for me was touch, challenging and surrounded in what anyone would term negativity, both myself and my business partner never stopped seeing the funny side of what was going on…because, at the end of the day, you are either on the path to laughter or tears.

Laughter is much better.

My mission is to share my life and business experiences, in the hope that it will help and inspire yours, so please share this article if you like it and should you be going through any problems of this nature or simply want some more information, please don’t hesitate to get in touch:

neiljcfranklin@gmail.com

Neil Franklin

Neil Franklin-Entrepreneur

Last modified: September 8, 2020

2 Responses to :
Business Failure: Why my First Recruitment Agency Failed

  1. Gerry says:

    “fastest route to that success is for the business owners to connect directly with decision-makers in their target customers…and at the highest ownership and executive levels.

    How it is done, however, may change but remember that when it comes to technology, for example, it is an enabler”

    Agreed! What would you recommend as of 2020 on this particular in the world of technology recruitment, where decision makers have become very difficult to reach via cold phone call, (no deskphone is common in tech co’s) making it challenging to connect, Email, social media?

    1. Neil Franklin says:

      I like to contact executive assistants and simply ask for help.

      They are very influential and will provide a great deal of information and help if they are approached in the right manner and they are certainly not gatekeepers!

      You have to be strategic when using this approach and not trying to sell a product or service from the start.

      Social media is a great option but only if it is used in the right way. You have to be yourself and not come across as too pushy. Email works well when you have a warm intro.

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