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 Sub-Chapter S taxes, on behalf of their 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 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 lawyer, accountant, 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 business to protect. If they have to make a choice between standing with you during a time of controversy or protecting their own reputation and future business, they will make the decision that is in their best interest.
You are paying these people to perform a service, and you have a right to expect that they will deliver that service. You are not paying them to risk their career or their future — so do not expect that they will deliver that service.
3. Always Diversify Your Financial Holdings.
To be a successful businessperson, you need to be an optimist. As optimists, we always think our businesses will last forever or that we'll be able to successfully deal with new challenges as they arise. However, 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."
Just as you would never compromise the moral high ground, you should never compromise the physical high ground. It is a lot easier to defend from the inside than it is from the outside.
5. Hire a Business Analyst — Before the Crisis.
Virtually every business with which 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 employs a professional to review the business and the business 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!
