Episode 174 – Harry Clark: Mistake Millionaires Make
Steve Shallenberger: Welcome to our Becoming Your Best Podcast listeners, wherever you may be in the world today. This is your host, Steve Shallenberger, and we are thrilled to have you joining us. We have a very talented guest today, he is the founder and CEO of two Inc. 500 Companies and was awarded Entrepreneur Of The Year! Welcome, Harry Clark!
Harry Clark: Well, hi there, Steve! I’m glad to be here!
Steve Shallenberger: We’re so excited to have you. He has a great deal of experience in a number of different aspects of business, he is going to share that with us in a bit. He is a highly awarded serial entrepreneur, business advisor, board member, keynote speaker on entrepreneurship, and he was formerly the CEO and co-founder of a modular design-build and development company. He grew up from a startup to $100 million and 450 employees, in five years. As you’re going to see very quickly, Harry knows both sides, every side really, of business, and this is going to be so fun for us to be able to talk about. So, Harry, first of all, tell us about your background, where were you raised and any turning points in your life, that have had a significant impact on you and especially on some of the things you’ve ended up doing.
Harry Clark: Yeah, sure. I was born in Rhode Island, but I was pretty much raised in California, in Southern California. I went to University at Cal State Long Beach, called Beach. Anyway, it’s a University right on the beach. I enjoyed being an NCAA Division 1 wrestler, heavyweight wrestler all through undergraduate in grad school, which definitely made a big impact on me. It definitely underscored competition and working really, really hard. Anyway, that was pretty exciting. Out of grad school, I got an MBA, I worked at Deloitte and Ernst&Young, on the consulting side. That was just a fantastic experience! You basically get, in one year’s experience working there, you get about four or five years of normal experience, so it was fantastic. The manager that hired me out of grad school, at Deloitte, became a partner at a Municipal Finance firm and he brought me over there, they made me a partnership offer, we couldn’t quite settle on it, so I started my own company, and that was a Municipal Finance Software and Services firm, current to be the largest in the US and in about seven years, I sold it to a Fortune 100 company, for a huge pile of cash, which kind of set us up for life, if you will, financially, and then started the Modular business that you talked about.
Steve Shallenberger: Well, that’s an awesome background, and thanks for sharing. Those are huge experiences, that have had a big impact. Now, Harry and I had the opportunity to meet, not long ago, just a few weeks ago, in Cape Town, South Africa. What a great place, isn’t it, Harry?
Harry Clark: Oh, God, just beautiful.
Steve Shallenberger: It was amazing! And I had the opportunity to be in a workshop that Harry did, and that’s really the genesis of this opportunity today. It was fun to meet him and his lovely spouse. So, Harry, share with our listeners the business experience that led up to your book, “Mistakes Millionaires Make”, and I might add for our listeners, these are just great principles for anyone. In another sense it could be, “Mistakes People Make”, but tell us about that, would you?
Harry Clark: Yes. So the Modular company that you have referred to, after five years from the startup, literally, there were five of us, we had 450 employees and $100 million in sales, we had bookings for $200 millions for the next year, and by the way, this is in 2004. And so, we’re just growing and it’s taking off like a rocket ship, so we went out to raise $20 million in private equity money. I had been funding it completely, myself. We had five different offers for $20 million in equity, for 20% equity stake in the business. We selected one that said they could get us the money in 30 days. Everybody else said 70 to 90 days, so I figured, “Okay, the sooner the better” because of how fast we were growing, and literally, the day that we were set to close, the private equity member had basically thrown me over a barrel, and the way he did that, is that the Friday before closing on Monday, he had his manager convince my CFO to blow out all of our remaining cash, so that on Monday, when they’d put in the $20 million, the payables would be caught up and lines of credit would be paid. But instead, what they did is, the owner of the private equity firm called me and said, “Harry, we’re set to close, we love your company. However, right now, you have no cash, which means you need us more than we need you. Because of that, we’re going to want an 80% equity stake, rather than the 20% that we’ve been talking about.”
Steve Shallenberger: Oh, my goodness!
Harry Clark: So, he was obviously completely unethical and actually became a billionaire by being unethical. Anyhow, so, I had said “No” to him, and it literally ended up making it so that the business went under, because I had all sorts of personal guarantees had dragged this, you know, well-funded, beautiful state that I had developed personally from the sale of my first business, I basically lost everything, so I lost $100 million in personal wealth.
Steve Shallenberger: Wow, that’s a big Wow, isn’t it?
Harry Clark: Yeah. It was a bad year, let me tell you.
Steve Shallenberger: And, upon some reflection, which you’ve obviously done, some serious lessons that you’ve been willing to share and learn about, and one of the things that Harry shared with us, were 19 risks for businesses and I think it was eight risks for individuals that you ought to avoid, completely. Do you mind talking a little bit about those, and if our listeners would like a copy of those, with Harry’s permission, you’re welcome to write to us, at email@example.com and we’ll be happy to send them to you. Or, you can write directly to Harry, either way.
Harry Clark: Yeah, and as a matter of fact, those two little slides were on a printout that I handed out at Cape Town, and I’ve since, heard from a CEO of a large family business in Cape Town, that he’s laminated that page and it’s on his wall in his office, and he and his wife, actually, review it monthly.
Steve Shallenberger: Oh, yeah, this is a cool sheet, I mean it’s [don’t understand – 08:13]
Harry Clark: Yeah. I would definitely recommend for your listeners to do that. It’s interesting because what I ended up doing, Steve, is I did recorded interviews with 30 other CEOs that had made a loss between $10 and $200 million and then I correlated the risk factors and that became the research that developed my book, “Mistakes Millionaires Make.” And that was the genesis of the 19 business risk factors. This is a compilation, basically, of 30 very successful CEOs, learning lessons, or failures, if you will. It varies from, for example, a very common issue is that a CEO will have a CFO or a controller that listens to everything they say, and does exactly what they want, when, in actuality, the CEO should be really listening to their Chief Financial Officer, or accounting people, to get warnings or red flags of things that they may be doing that are creating risk for the company. Also, things like, not having an Advisory Board, some insurance issues, where to save expense, you forego Errors and Omissions Insurance and other different types. A real big risk factor is also just overspending, and also getting into too much debt. Another risk factor, Harvard had actually done a study, that 80% of all acquisitions sale, that’s pretty profound. That means you only have about 20% chance of getting an acquisition right.
Steve Shallenberger: That is a staggering number!
Harry Clark: Another interesting result from that study is that two-thirds of the senior staff that are acquired through an acquisition, are gone within 2 years.
Steve Shallenberger: Oh my goodness!
Harry Clark: So, all of that intellectual talent and experience that you think you’re buying, is probably going to leave.
Steve Shallenberger: Well, that’s just staggering, isn’t it?
Harry Clark: It is, it is.
Steve Shallenberger: Those numbers!
Harry Clark: And imagine how many billions of dollars are basically burned up through failed acquisitions. I mean, it happens every day.
Steve Shallenberger: Wow! Talk about risk, it’s good to understand those numbers going into an acquisition or a sale, just so you know what you’re up against. A couple of others that have just stood out for me is, avoid excess debt.
Harry Clark: And by the way, Steve, it’s so easy when the debt markets are super cheap, meaning interest rates are low and there’s available capital. It’s really easy to overburden your business with that.
Steve Shallenberger: Yeah, amen! And also, you talked about guarantees. That’s a big risk, and being thoughtful about what things that you do, put on your balance sheet, so that you have some security in your life if things go south.
Harry Clark: Absolutely, yeah! Even having cash reserves. I mean, the best practice is they have up to a year’s worth of expenses that are stocked away in cash or some kind of cash equivalent.
Steve Shallenberger: Harry, what would you say are the most common risk factors for entrepreneurs?
Harry Clark: The number one, for sure, is having personal guarantees. So, that’s when, if you’re a business owner, sometimes investors, but normally business owners, they guarantee loans, leases, for example, construction companies, like in my case, bonding lines, require personal guarantees. So, it’s having those personal guarantees, which at the end of the day, you don’t have to have, it’s just that, for example, by signing a personal guarantee for a line of credit or a loan, you might save a little bit on interest, but you don’t have to have it. So, that’s really the number one risk factor.
Steve Shallenberger: Let’s just pause on that for a second. So, some of our entrepreneurs that are listening in, they may feel like they have to give a personal guarantee, so maybe there’s a couple of aspects to that, Harry, that we can just explore a little bit further. How can someone structure their situation, say they have a home, but they don’t want to put that at risk? And the banker says, “Well, we want your personal guarantee.” What are some options?
Harry Clark: This is really very practical to talk about. Well, first of all, going to your banker or whoever you have the personal guarantee with, and telling them that it’s your objective to remove all personal guarantees from your life or your liability and that you want to come up with a plan on how to do that. So, that’s step number one. Number two, if the bank or whoever the person guarantee is with is saying, “No, I’m sorry, you’re not there, you just don’t have a strong enough balance sheet in the business”, then you would want to demand that certain assets are carved out or removed from the personal guarantee. So, rather than just signing an open-ended personal guarantee, saying, “Everything is yours”, in the worst case, you carve out certain assets that are really important for you and your family, from the personal guaranteeing.
Steve Shallenberger: Okay, that’s great advice! A couple of strategies that our listeners may consider in doing that, sometimes the business will have adequate assets, but the financier, whoever it may be, still wants a personal guarantee, and one thing that you may consider, is putting your home, either into a trust, and you rent the home and pull that off of your balance sheet so it’s all above board, the bank sees what’s on your balance sheet, but your home is owned by another entity, and then you rent from it, so that’s completely legal, or could be in the name of a spouse, so there are different ways maybe to do that, right?
Harry Clark: Yes. However, just be careful or cognisant of the fact, like in my case, there were LLCs or family limited partnerships that owned almost all of my real estate assets, but my wife and I owned 100% of all of those entities.
Steve Shallenberger: Excellent!
Harry Clark: So, through bankruptcy, it literally took five minutes for the judge to roll up all of those assets into my personal bankruptcy, so if you’re going do that, which I think is great, it’s a great way to do it, you just have to do it thoughtfully and make sure that whoever is helping you, your advisor setting it up, are aware to protect you against any credit risk or bankruptcy risk.
Steve Shallenberger: Excellent, yeah, well done! Good cautions all the way through and good advice. Okay, you were continuing with other common risks for entrepreneurs.
Harry Clark: Actually, there’s one that gets back a little bit to the CFO issue, having a weak CFO, and that is, as entrepreneurs or investors even, and when I say entrepreneurs, it includes family businesses, that we are genetically overoptimistic, and researchers are showing this. And it’s that, at the end of the day, while personal guarantees are the number one immediate risk factor, it’s overoptimism that sets us up, to say, “Oh yeah, I can sign a personal guarantee, because my business will never fail.” And so, understanding that in the end, optimism is great, right? I mean, it makes us exciting at parties and makes us friendly, but at the end of the day, it puts our family, and our businesses, or employees, at risk. So, that’s why, if you know that you’re optimistic, or overly optimistic, to surround yourself with people and advisors that help balance that, so you can be more objective and make better-informed decisions.
Steve Shallenberger: Well, outstanding advice! You just took my next question. How do they temper the optimism and be as realistic, so that they have a good balance?
Harry Clark: Yeah, right. Well, you know, especially for your listeners that are CEOs or business owners, really, a lot of times we feel like there’s no one for us to be accountable to, so that’s when it gets really difficult.
Steve Shallenberger: Right. Well, I love your advice to have an Advisory Board. That’s huge, isn’t it? To be able to bounce things off people and get different perspectives?
Harry Clark: Absolutely! And the best Advisory Board is made up of members that challenge you, that they don’t just agree with you, you know, that they actually challenge you and question things and make it a little bit uncomfortable, and a little bit difficult. That’s a really good advisor on an Advisory Board.
Steve Shallenberger: What’s your best advice, Harry, for individuals, to be financially sound, to try to eliminate the risk in their own life?
Harry Clark: Yeah, well, so, this gets back to behavioral economics and research, that having cash or some kind of cash equivalence readily available, it’s very, very important. And the reason why is that if you remember, you know, when we have the financial crisis or other recessions, and the stock market plummets, studies show that it’s in human nature to pick up your phone and to ask your [don’t understand – 19:22] manager, to liquidate, to sell, and what we found, is that about 30% of investor’s wealth is lost during those times when they just pick up the phone, and say, “Sell.” So, by having cash in up to a year’s worth of cash, or, again, some kind of cash equivalent, it makes it so you don’t have to pick up that phone and say, “Sell.” And in so doing, statistically, or historically, after a year the stock market is back up to where it was. So, just having that buffer is really, really important.
Steve Shallenberger: Well, thanks for bringing that issue up, Harry, and maybe some of our listeners are at the front end of starting to develop a savings program and I think what we would suggest to you is just start setting aside a percent of everything you earn, for you. You’re paying everybody else, already, so pay yourself as well. Maybe a benchmark might be 10%, but just start, and it will have a big impact so that it helps you get, if you’re not there today, where Harry is talking about, so that you’re in that position, right?
Harry Clark: Yeah, that’s great advice! Absolutely!
Steve Shallenberger: And probably try to minimize credit card debt. I’ve seen the interest on those and, not today, I’m not paying it, but I have in the past sometimes, and it’s huge!
Harry Clark: Yeah, absolutely! Yeah! As a matter of fact, it’s interesting that one upside of this last recession that we’ve had is that it really got people to save, or to get in the habit of saving, and so, yes, I totally agree. Just setting, it doesn’t matter if it’s $100 a month or what have you, building up that muscle of learning how to save, is really important.
Steve Shallenberger: Alright. So, as we sit back now, and getting towards the end of this interview, today, what are final tips that you might offer an entrepreneur and final tips for somebody managing their personal finances.
Harry Clark: With regard to, if you manage your business, innovation is going to be, or continue to be a critical factor, and I recommend businesses go to the Adobe Kickbox program, and you can just google Adobe Kickbox, it’s a free workshop that you can download and teach your team members how to innovate and basically, make it so that all of your team members or employees are innovating, week in and week out, and this is especially important, I think, for family businesses that can get a little bit stale. So I highly recommend that, and it’s free, there is no charge for doing that. In terms of, you know, on the personal side, I think we’ve covered really the key ones, which is the personal guarantees and trying to eliminate any personal guarantees, saving and not getting into debt.
Steve Shallenberger: Yeah, perfect! Okay, well that’s great! Now, I’ve read Harry’s book, “Mistakes Millionaires Make”, that contain the interviews, lessons learned from 30 successful entrepreneurs, it’s a treasure trove of insights and advice. So, Harry, how can people find out more about what you do?
Harry Clark: The book is available on Amazon. We have it in digital, there’s a hard copy, and also an audible, so no matter how you digest books, you can read it, it’s a very good read. I also have a website, pathwaypartnersllc.com, you can learn a little bit more there.
Steve Shallenberger: Well, you’re a great resource, Harry. It’s fun to visit with you, and today I’ve just been thinking about this, is our listeners think about the 12 Principles of Highly Successful Leaders from Becoming your Best. We’ve certainly touched on, “Lead with a vision”, in other words, get out of debt, no personal guarantees, you start setting up this vision of some of the safeguards for yourself, to put you in a better position. We’ve also talked about another one of the principles, which is “Innovate with your imagination.” This is one of the key recommendations Harry just made, which is always staying ahead of the curve, both business-wise, and individually, and then, last of all, is “Apply the power of knowledge”, and that’s what we’re doing today, it’s when you have these perspectives that we’ve been talking about and has a tremendous impact on your behavior of getting to a better place. These all contribute to being highly successful ultimately, in your life, becoming your best, which is a process. So, thank you, Harry, for being part of this show today!
Harry Clark: My pleasure! And I loved reading your book, by the way.
Steve Shallenberger: Oh, well, thank you so much, and this has been a really productive visit, it’s been helpful for me, and we wish you, Harry, all the best, as you’re making a difference in the world.
Harry Clark: Alright, thank you, and keep up what you’re doing. It’s great!
Steve Shallenberger: Okay, thank you! And to all of our listeners, never forget: you too can make a difference every single day! This is Steve Shallenberger, with Becoming Your Best Global Leadership, wishing you, a great day!