COMING UP FAST: A SECTION FOR ENTREPRENEURS - Building to Last, Emergency Drill

COMING UP FAST: A SECTION FOR ENTREPRENEURS - Building to Last, Emergency Drill - DILEMMA: Losing our biggest customer has plunged us into loss. They're also suing us for pounds 5 million damages, which could wipe us out. I haven't told our non-execs, the

by PATRICK DUNNE, who works with 3i
Last Updated: 31 Aug 2010

DILEMMA: Losing our biggest customer has plunged us into loss. They're also suing us for pounds 5 million damages, which could wipe us out. I haven't told our non-execs, the bank or my VC backers yet, and we're going to have to cut staff drastically to stand a chance of surviving. I've gone a week without sleep and don't know who to tell first.

ISSUES: Are you sure no-one's noticed something's up? If not, then you're either always stressed out, not as stressed out as you say or surrounded by idiots. But the sooner you come clean, the greater the chance of survival. This is very material information. You have a duty to your shareholders, fellow directors and financiers to disclose it. Especially if you are now trading while insolvent or they have increased their exposure since you have known.

Why haven't you told the non-execs? This is exactly the time when they could be of most value to you. Do your executive directors know?

How's your relationship with other shareholders? Who owns the company? How are the non-execs, bank and VC backers likely to react to the bad news and the fact that you have withheld it from them?

It is not only the company's credibility that is under threat. If you have a minority stake, other shareholders may want to replace you with a turnaround chairman. They will all react a lot better if you have some sort of sensible survival plan.

You should consult your lawyer, who will probably advise you to call a board meeting. Before you tell anyone, you should write down the facts chronologically. Be precise about why you lost the customer, what the exact nature of their claim is and how your lawyer advises responding. Then consider the impact on other customers and your staff, as well as how to communicate realistically but without undermining confidence.

ACTION

- This is a crisis. You have a duty to inform your fellow shareholders and directors.

- Don't panic. Be clear on the facts and what the alternative responses are.

- Make sure you have a good lawyer. Call a board meeting and invite the lawyer along.

- Be realistic about whether you are the right leader to tackle what needs doing.

- Finally, make sure there is nothing else you've omitted to tell your colleagues.

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