I recently read Bad Blood about Theranos and watched the documentary FYRE, The Greatest Party That Never Happened. Both were infuriating scams fueled by the incomprehensible hubris and delusion of their founders, Elizabeth Holmes and Billy McFarland, respectively. Both founders told fraudulent and unfathomable lies and coerced people to bend to their wills, be they customers, employees or investors. The employees of these two enterprises were asked to cover up lies for their companies, which cost some of them their health, incomes and in one case, his life.
As a CFO, I’ve been asked more than once to fudge the numbers, or in raw terms, commit fraud. I could envision a plaintiff’s attorney deposing me and asking me if I prepared these financial statements, to which I would have to say yes, and things would have cascaded downward from there.
Sometimes, businesses get into jams with their lenders or investors, causing owners to feel pressure to fudge numbers or not disclose certain material developments. Pushing the first domino can cause a dangerous chain reaction that stresses employees and creates potentially catastrophic danger to the owner.
When events don’t pan out the way the owner envisions, an act that the owner rationalizes as not a big deal can spiral into a civil case and if material enough, could lead to criminal prosecution and possibly jail time. The legal costs to defend these cases are very expensive but worse, owners and their officers could lose their careers if things go badly.
Outcomes of these kinds of cases are extremely unpredictable, which is why business owners should never be tempted to alter or conceal information. Also, all financing deals, be it debt or equity, have reps and warranties in which owners must answer questions about past litigation and convictions. If any exist, doors to capital will be very hard to open. And doors to future job opportunities may be permanently closed.
I asked a senior banker friend of mine what banks do when borrowers are forthright with bad news. She said that foremost it builds trust and then allows the bank to work out an agreeable loan repayment plan.
So when you become aware of facts that result in a loan default or will disappointment investors, here’s what I recommend.
Research the causes of the unexpected results and be prepared to answer detailed questions about what didn’t go according to plan and what you’re doing to fix it and preserve capital. This will reinforce their confidence in your leadership ability.
Call your corporate counsel and ask if they feel it’s a material, disclosable event and if so, what to expect from disclosing it and how best to disclose it
Tell the truth and show that you’re considering their best interests, not just your own because lenders and investors will only stay with you if they trust you. It’s a lot easier to keep a lender or investor than find new ones so play the long game with them and they’ll stick with you
Develop a contingency plan to source new lenders or investors just in case you must do so.
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This is Robert Band, your business finance expert, helping business owners optimize their accounting and finance operations for maximum efficiency and usefulness. Remember, one tip could be worth millions and profits today become fortunes tomorrow. Contact Robert now.
Robert Band
Business Finance Expert
Email: reb@robertband.com
Phone:(305) 467-5909