About 2,500 people fall into bankruptcy each year. A small percentage are clients of my insolvency practice, which gives me an insight into how people react as their businesses unwind. I have noticed one common mistake and an obvious solution.
Company directors who enter bankruptcy fall into two broad camps that I call the Dreamers and the Failures. The Dreamers are those whose businesses were never going to work, yet they gave personal guarantees. When these debts were due, the only solution was a trip to the Official Assignee's office - the department that supervises bankrupts.
They are not as interesting as the Failures, directors who had, at least for a time, successful firms.
Companies fail for a number of reasons, but one thing they all have in common is their directors were financially ruined. Wealthy bankrupts living in trust-owned Herne Bay retreats exist, but these are the minority. Most failing directors empty their family trusts of their last denarii to prop up their ailing empires, which causes me to wonder: why did they put their family house into a trust if they were going to raid it later?
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Building a company changes priorities. At the time the family trust is established, the company is like an unborn child - it has no emotional appeal. Once the company arrives it changes the director's priorities and his identity becomes wrapped up in his creation (this is a predominantly male phenomenon; women do not seem so afflicted).
Because the identity of the director is bound to his business, the failure of one is the failure of the other. Business collapse becomes a form of psychic death.
I recently read Jim Collins' book, How The Mighty Fall, and the first sign of trouble identified is hubris born from success. Luck, as well as hard work, talent and the support of others, is needed for any success. However, success can breed arrogance and a failure to appreciate the real drivers of our achievements, as we believe our innate talents are all that are needed. When confronted by a set-back, a successful director can assume his inherent genius will overcome a temporary reversal of fortune. To keep his business alive, whatever equity is at hand is thrown on to the pyre.
The wives of these directors are often shocked to discover the state of their husband's, and by extension their own, financial affairs. This is ironic because it is the wives who often understand the good fortune that drove the initial success, but who failed to challenge their husbands as the family home was used as collateral to delay the failure of the business.
Business owners, including myself, rarely talk to our wives when the going gets tough.