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Saturday, March 01, 2008

Con artists and sleazes -- beware!

I am not qualified to comment on any specific business, but read the comments and articles in this Florida Today blog entry for an idea of some of the relevant issues.

Con artists and sleaze balls often thrive in recessions, capturing unsophisticated or unfortunate victims among the trades, suppliers, and clients. The reason is simple: Cons prey on the inexperienced and the desperate, and both are easier to find in hard times. The inexperienced are the new businesses which sprout up from laid off or dismissed employees of established businesses; the desperate include, of course, both these new businesses and the failing established firms, scrambling to keep enough cash and sales to keep the doors open.

As an example, one of the oldest tricks in the book is for a GC to bid low, win the job, and then selectively find fault and/or refuse to pay all or part of the sub trade bills, claiming one excuse or another. (See this blog entry from Michael Stone outlining how this practice seems to be reemerging in the communities he serves.)

This stuff happens, of course, because by bidding an uneconomically 'low' job, the GC can win it from a price-sensitive client; but preserve margins (or perhaps just survive) by not paying all the subs. "There are always more out there to do the work," the contractor thinks, and in hard times, there often are.

I well remember a classic example of this sort of problem in the last true multi-year real-estate recession, in the early to mid 1990s. Sub trades burned by a well-established (and therefore bondable) general contractor began running into one problem after another, not being paid -- compounded by abusive "blame the subs" complaints by the contractor. Finally, a group of relatively well funded subs and suppliers did something we rarely see in business -- they petitioned the contractor into bankruptcy, claiming that he was effectively insolvent, despite all his denials. The result: an extremely rare bankruptcy court trial, with witnesses, and weeks of testimony (and some truly huge legal bills). The judge ultimately agreed with t he plaintiffs that even though the business operator claimed he was not insolvent/bankrupt, his systematic failure to pay many bills indeed represented insolvency, and thus bankruptcy.

Trouble is, if you are caught by one of these operators, you are unlikely to have the cash and time to go to the expense that occurred in this example (I remember straining my own limited publishing budget, because we had to have a qualified reporter in the courtroom every day.) So the sleaze-ball gets away with the crime.

What can you do to avoid getting caught in this kind of mess? The basic rules of business, good times and bad, apply, and you can use these measures to avoid being snared.
  • Avoid being caught with one major client. If you do, you are hostage to the client. If he fails, or decides to get nasty with you, you are caught in a vice. While it is good to have large jobs, it is better to have many medium-sized projects with different clients.
  • Listen to your intuition. If something doesn't seem quite right, check it out -- thoroughly. First impressions often are right.
  • Be really connected in your community; providing your community is one of successful business people. (The worst danger however is to be in a community of unsophisticated people -- friends refer friends and some of the worst Internet scams, for example, have found fodder in church and community groups where members trust each other and don't realize an outsider has infiltrated.)
  • If you have a chapter in your area, join the American Subcontractors Association, or at least one of the reputable and well established associations for your trade. You can then call informally on association staff and your peers for guidance.

These are not perfect solutions. The contractor our community pushed into bankruptcy back in the 1990s had previously a very good reputation -- and in fact his family members carried on once he was put out of business. But if you use these approaches, you'll likely be much safer and less likely to fail, good times or bad.

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