Monthly Archive for June, 2009

How judicial empathy harmed one small business.

Upon the announcement of the retirement of Associate Supreme Court Justice, David Souter, President Obama announced that he wanted to replace Souter with someone who has “that quality of empathy, of understanding and identifying with people’s hopes and struggles.”

Days later, the president made good on that promise by nominating Sonia Sotomayor to replace Souter. Based on Sotomayor’s past rulings, as well as comments in speeches and participating on panels, Mr. Obama accomplished his “empathy” goal. In a speech at Berkeley, Judge Sotomayor said, “I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion as a judge than a white male who hasn’t lived that life.”

How does empathy, gender, race or experience reconcile with what is no less than the cornerstone of American jurisprudence, blind justice? What would empathetic justice look like? In my career as a business owner, I’ve had some experience with an empathetic judge who chose to peek under the blindfold she swore to wear when ruling on petitions brought before her. Here is that true story.

A salesperson was hired by me to call on prospects and customers of a company I owned. Since I knew I would be giving him proprietary pricing and sales strategies that were the intellectual property of my company, I asked him to sign a non-compete agreement when he was offered the job. By accepting, if he should leave my company for any reason, he would have to forgo operating in my industry within a reasonable geography and time frame. He signed and went to work.

Less than two years later, I discovered that he was making plans to quit, and in fact had already started his own new company which would compete directly with my business. Worse, he was actually telling my customers about his new venture in an attempt to subvert sales to him. Not only was his future behavior going to violate the non-compete agreement, but his disloyalty is against the law in our state. Immediately after he was fired for this infidelity, he opened his competing business with a storefront location.

In the subsequent non-jury lawsuit I brought to enforce the non-compete agreement, the District Court judge, who just happened to be a woman, listened to the facts, reviewed the evidence and ruled in my favor. The defendant should cease and desist operating his business for the period and geography he originally agreed to. Alas, he continued operating his business, in defiance of the court order.

Within six months, we were able to bring the man before the judge again with the evidence of his continued violation of the agreement and the court order. But instead of throwing the book at the defendant, incredibly, the judge instead dismissed her earlier ruling against him. Her reason? She had since discovered that her daughter knew a member of the defendant’s extended family who, as a teenager, had been killed in an automobile accident a few years earlier. The judge went on to say that she now felt the family had been through enough and, essentially, she didn’t want to place any more hardship on them.

Thus, I came face-to-face with judicial empathy and found it violated a valid contract, disregarded testimony, facts and evidence and preempted the constitutional right of this American citizen to petition the court with an expectation of receiving blind justice. My brush with touchy-feely justice cost me a few thousand dollars in damages and legal fees. But if empathy as a basis for deciding cases at the Supreme Court level becomes reality, I fear it will undermine two of the cornerstones of our nation: the sanctity of a contract and the judicial system that for more than 200 years has been the model for the rest of the world.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about my experience with judicial empathy. Take a few minutes to listen, and be sure to leave your own thoughts and experiences.

Angel investors and other small business capital sources

Blasingame’s 3rd Law of Small Business states, “Its redundant to say ‘undercapitalized small business.’”

There are two primary reasons this Law is true:

1. Unlike big businesses, small businesses typically have only three sources of capital: a) retained earnings (profits left in the business); b) direct investment, usually by the founder; and c) debt, usually from a bank.

2. Everyday one or more elements of a small business are screaming for funds to increase the company’s competitive advantage.

Even very successful small businesses are undercapitalized. In fact, ironically, the more successful a small business is, the more undercapitalized it will likely be. If a business is not growing, it needs capital to achieve growth. A growing business needs capital for R&D, upgrading technology, acquiring new product lines, funding accounts receivable and inventory that increase with sales growth – the list is long.

For most small businesses, the lion’s share of capital comes from retained earnings and bank debt. However, other than the founder’s investment, direct equity capital is less likely. But when outside equity is acquired, the next most likely source is from angel investors, which has become an increasing direct investment option over the past few years.

An angel investor is typically an individual who has money to invest and, instead of putting all of it in the stock market, he or she will allocate a portion to invest directly into a business, which could be either a start-up or a going concern. More recently, angel investors have formed regional consortiums to aggregate their investment dollars in order to spread the risk and make sure that they don’t make the mistake of under-funding a venture.

Most people have heard of venture capitalists (VC), the big dogs of entrepreneurial investment. Angels are sort of mini-VCs. The big difference is the level of funding and, in many cases, the closeness of the relationship with management; angels will be more likely to be geographically and emotionally closer to their recipient than a VC. The big similarity is that both anticipate an exit strategy where their capital – and hopefully a profit – are returned. This last point is the primary reason why most small businesses are not candidates for any investor capital, since the typical small business founder expects to run his or her business forever and perhaps hand it off to the next generation.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about how angel investors choose investment candidates with Tim Berry. Tim is the world’s leading expert on business planning, founder of Palo Alto Software, an original member of my Brain Trust and my good friend. Tim is not only an angel investor, he is a member of one of those angel consortiums mentioned earlier. Take a few minutes to listen to what Tim told me about his experience and this fascinating process.

How GM’s bankruptcy could become a cautionary tale for small business

At the beginning of each year I publish my predictions for that year. This was one of my 2006 predictions:

“Prediction: At least one U.S. car manufacturer will file Chapter 11 bankruptcy. It will probably be GM. All three have too much 20th century employee benefits baggage to be viable in the 21st century global marketplace. The other two will follow.”

Turns out my vision was pretty good, if not my timing. After 101 years of operation – for decades the largest automobile manufacturer in the world, and one of America’s great industrial success stories – General Motors succumbed to what I believed was inevitable over three years ago and filed for Chapter 11 bankruptcy protection.

Chrysler, also once a venerable industry force, had in recent years taken a circuitous route from a publicly traded company, to being acquired by Daimler Benz, then a private equity firm, and finally, on April 30th of this year, went into Chapter 11. One of the main reasons Ford hasn’t filed for bankruptcy, nor took government assistance funds, as GM and Chrysler did, was because it raised capital from mortgaging many of the properties it owned, which old Henry had paid for decades ago.

It’s important to remember that the so-called Big Three represent the remaining American car companies, not the entire U.S. automobile industry. While the other companies, represented by foreign owned firms that have established factories and successful distribution in the U.S., are not exactly thriving in the current economy, none are in peril of failure.

So what sets the two auto industry groups apart? Primarily two things unique to the Big Three: 1) Bad management; and 2) United Auto Workers Union (UAW).

Bad management can be replaced with good management. Indeed, this has happened with the foreign companies from time to time, and could have happened in Detroit. But the one thing the Big Three couldn’t overcome was the current and residual baggage imposed by generations of unsustainable wage and benefits concessions in the UAW contracts.

At the very moment that two of the Big Three are experiencing the most ignominious circumstances for any company, bankruptcy – fully half of which blame must be laid at the feet of the UAW – there are lawmakers pushing a bill that would increase the ability of unions to organize more easily in smaller and smaller businesses. Without any sense of irony, Congress is bailing out one union-laden industry, while trying to make forming unions easier. It’s a story that would be perfect in a Bizarro World comic book.

The bill in question is called the “Employee Free Choice Act” (EFCA). This is a misleading title, because one of the markers of this bill is to remove the secret ballot provision, long required by labor laws, and replace it with the ability for a union organizer to push a ballot in front of an employee and require them to vote in front of them. There is more bad news for small businesses in this bill, but isn’t imperiling the sanctity of the secret ballot, a hallmark of America, enough to oppose this legislation?

If the Employee Free Choice Act ever becomes law, the following year I will be forced to include this in prediction: “Hundreds of thousands of small businesses will make these three unnatural management decisions in reaction to the EFCA: 1) off-shoring jobs; 2) limiting growth of the business to keep them under the number that EFCA allows; 3) and some will just close up rather than unionize, knowing that to do otherwise would merely prolong the inevitable experience of GM and Chrysler.”

Recently, on my small business radio program, The Small Business Advocate Show, I talked about the EFCA and the dangers it poses for small business. Take a few minutes to listen, and be sure to leave a comment.

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