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Capitalism At Its Best

Capitalism at its bestOn March 17, 2020, John Costello, the owner and CEO of Cherry’s Industrial in Elk Grove Village, Illinois, entered a nightmare.

On that day he learned that his wife, who works in the business, fell ill. She exhibited all the classic symptoms of Covid-19, such as a fever, dry cough, and a sore throat. But, with limited testing available at the time, they couldn’t be sure.

Then, their son experienced similar symptoms.

The state of Illinois soon issued shelter in place orders, which forced the company to transition.  Several employees shifted to working remotely, while production staff and managers continued to work on site.

At that point, Costello’s business, which builds and sells specialized equipment used in food, pharmaceutical production plants and warehouses to transfer product on and off pallets, was considered an essential business in the wake of the pandemic. The company, which sells primarily to Fortune 500 companies, also manufactures equipment used to clean and maintain pallets.

In fact, business was booming given the need to ship food and goods around the country. Costello and his team were working around the clock to keep up. But a few days after his wife got sick, Costello began feeling extremely fatigued—another symptom of the virus. He went home—and stayed there for two weeks.

Despite efforts to keep social distancing and disinfecting practices in place, a few on-site employees developed symptoms and tested positive—one of whom was hospitalized. Costello then made the tough decision to shut down production for at least a week.

He made that decision knowing that their customers needed them, especially those involved in maintaining the nation’s food supply. “We were getting calls from people desperate for parts they needed the next day,” says Costello.

“We didn’t want to let these companies down. We knew people needed what they were trying to ship.” But he also needed to ensure the health of his people—and his family—first.  

 

Restarting the Business

Once he started feeling better, Costello went back to work. He knew he was likely already exposed, but he didn’t want to put anyone else at risk until their plant was safe.

“I looked everywhere for a fogger to disinfect our two buildings, but I couldn’t find anything,” he says. “So, I wiped down every surface by myself and with some help from my shipping guy. But I was in there by myself a lot, which gave me a lot of moments to reflect—especially on the things I was grateful for.”

At the top of his list was his family, as well as his team of 15 employees. “I am so grateful my family and the employees who got sick have all now fully recovered,” says Costello. “We have an amazing team of people.”

He also took a moment to appreciate how making the decision to empower his team through the principles and practices of The Great Game of Business® had completely transformed his business—and helped it cope with the challenges they were now facing in the wake of the pandemic.

“Two years ago, we would have been in serious trouble,” says Costello. “I think people would have rallied to the cause, but now they already know what they need to do to take action. There is safety in everyone knowing the numbers. If things start going down, we know exactly what we need to do to fix them. I feel so sorry for the business owner who keeps secrets to themselves. It’s so empowering now that our whole team knows the numbers rather than just me or our accountant.”

Costello and his team also took actions to help generate cash inside the business, like calling customers two weeks early to ensure invoices were logged in their system. “We think we can ride this out because of the two years of effort we have put into education and playing Great Game,” says Costello. "We continue to hold our weekly huddles virtually and they have become like a life raft. All of us look forward to talking to each other. People ask, ‘How are you doing?’ and they really mean it."

Costello says that he emulated the game plan that Jack Stack and SRC used in the wake of the 2009 recession (and again in 2020) where he laid out the company’s financial position and what would need to happen in several worst case scenarios—Defcon 4 through Defcon 1—to sink the business.

“It was a tough conversation,” says Costello, noting that they had already been working for months to build a “war chest” of cash to help them in case of a recession. “But several team members called me afterward and told me how much they appreciated that I just laid things out there."

“People were still nervous, but it wasn’t a sense of doom-and-gloom like we would have faced in the past. We knew we were stronger together.”

 

A Turnaround Story

Five years ago, Cherry’s was at a low point. “Revenues were down, morale was terrible, and employees were just going through the motions,” says Costello. “To make matters worse, my business partner and I were in constant disagreement about the path forward for the company after we bought out the founder.

The company was in need of a big change, not only for financial stability, but also a cultural shift to keep the employees happy and engaged.”

In 2014, Costello pushed all of his chips onto the table to buy out his partner. But when he went to their bank (one they had a longstanding relationship with) the lender balked. “They told me that my partner was the real brains behind the operation,” says Costello. “They wouldn’t lend to me. It was like they had stabbed me in my heart.

He then took a different route to raise the money to buy the business. He secured a small loan from a bank, emptied his 401(k) account and borrowed the rest by taking out a loan against his family’s home. But that still wasn’t enough to cover the full price.

He was forced to work out a deal with his ex-partner to finance the rest—with a catch. “He told me that if I missed even a single payment, he would come back and take over the business,” says Costello. When Costello shared the terms of the deal with his accountant and general manager, they told him to back away: it was a lousy deal.

But for Costello, there was no going back. This was the only way he could find freedom. He signed the deal. 

Over the next couple years, the team grew the business, but not enough to support the debt obligations Costello had taken on. And no bank was willing to refinance the debt until the business showed an extended period of revenue growth and healthy net profit. “I knew that my current workload was unsustainable,” he says.

I was stressed and overwhelmed dealing with the burden of the debt on my own. My team didn’t understand why I was so ornery all the time. In their mind, business was going great. Revenues were up and everyone had received a bonus based on sales. The truth was I was tired of pushing the cart up a hill. I was out of gas. But I was also scared as hell to share anything with anyone.”

Then, in September of 2017, at a point of desperation, Costello contacted The Great Game of Business. What he didn’t realize was that he was already connected to Kevin Walter, a fellow business owner in Elk Grove Village who also happened to be a Great Game™ certified coach.

Costello and three of his managers went to visit Walter at the business he owned with his two brothers, Tasty Catering, so they could watch a huddle in action. “It was definitely an eye-opener as we saw the employee engagement, the scoreboards, and especially how the financials were shared,” says Costello.

After some preliminary work by a 7-person design team, Cherry’s launched Great Game in February 2018 with a company-wide Huddle. They started with a question for the entire team. They asked everyone to guess what the company’s net profit percentage was. Answers ranged from 20% to 26%. You can imagine the shock when the team learned that the actual number was closer to 5-6%.

For Costello, his biggest surprise came when he explained what the term “fixed charge coverage/covenant” (FCC) ratio meant and that, if the company fell below the number, technically, they would default on their note to the bank. “I was afraid that when they saw the numbers, they would all want to leave,” says Costello.

But then something unexpected happened. One of the team members raised his hand and asked what would happen to the FCC if they paid down the debt faster.

“This was a ‘wow’ moment for me,” says Costello. “Here I was afraid to share the financials, but, after opening up, I now had a team member asking a question about paying down debt and what that meant to the financial stability of the company moving forward.”

The FCC then became the team’s critical number and, less than 14 months after they launched The Great Game of Business, they were able to pay down the line of credit to a zero balance.

They also made additional principal payments on the note, which allowed them to retire the loan in December 2019 instead of January 2021. Just as importantly, they were also able to move the personal debt from the home equity loan onto the company.

Perhaps the person most impressed at the rate at which Costello and the Cherry’s team paid down their debt was someone you might not expect: their banker.

“Our banker introduced me to the president of the bank at an event we were attending, and he described how incredible it was that we had an income statement scoreboard on a wall of our warehouse,” says Costello.

“The bank president asked me to tell him about our Great Game experience, and after listening to our story for 30 minutes, was just about speechless. He told me he had never heard any other business doing anything like that.”

Perhaps just as importantly, the lessons the team learned in paying down debt continue to resonate.   

Case in point: the day that Costello made the call to shut down his business, one of his employees, a man in his 40s named Jerry, pulled Costello aside. Jerry told Costello that he didn’t have internet access at home, which would prevent him from working remotely. “I told him not to worry about his pay and that we could cover him for the week,” says Costello.

But that’s when Jerry looked at Costello and told him that he wasn’t worried about the pay because, thanks to the lessons he had learned from The Great Game of Business, he had become completely debt free (including mortgage) just a couple months earlier.

Jerry told Costello that he had read The Great Game of Business book cover to cover and that it was the best thing to ever happen to him. “I couldn’t be prouder of him and how he’s taken what we teach at work and applied it to his home life,” says Costello.

 

Moving Forward into an Uncertain Future

When he talks to other business owners these days, Costello admits it can be an awkward conversation.

“All they want to do is commiserate about how bad things are,” he says. “They’re not talking to their people about what it’s going to take to survive. They’re holed up in their offices with their accountants and bankers. Meanwhile, we haven’t laid anyone off and we continue to take care of our customers. Yes, we have had to overcome some challenges with remote work and Huddles, but we are doing well. I feel so lucky. But I also think we all have the power to make our own luck.

Costello says he was recently contacted by a friend who had just purchased a business and was interested in getting Costello to join a CEO peer group with him. “I told him I had found a different kind of community, The Great Game of Business community,” says Costello. “He didn’t know much about it, so I invited him to join one of our virtual Huddles.”

Costello says he watched his friend’s face as the Cherry’s team walked through their forecasts and actuals—recognizing something similar to awe dawn on his face. “He called me right after and told me he had never seen or been around anything like that in his life,” says Costello. “He couldn’t believe how much positive energy there was around the discussion, which I thought was funny because it seemed like it was somewhat off to me. But it was nice to have someone from the outside come in and help validate what we are doing. I love that my role has been diminished to the point where I just end every Huddle by saying: “Let’s build something, let’s sell something, and let’s collect cash.”

For Costello, he hopes these uncertain times can also serve as an opportunity for some businesses to open themselves up, throw out the business models of the past, and have the courage to reinvent their business through transparency and by engaging the 'wisdom of the crowd'.

“I came to embrace Great Game when I was desperate,” he says. “I knew I had to change, to do something differently. Maybe for those business owners out there today that are struggling, this will be their opportunity to change how they do business. I would encourage anyone who is feeling desperate and alone to know there is a community here who can help. My message to you is that there is still hope if you know where to look for it.”

As Jerry, the employee who paid off his debt told Costello, “The Great Game of Business is capitalism at its best.”

 


With business and the economy in chaos, there’s one thing we know for sure: YOU HAVE TO MAKE BOLD MOVES TO CREATE YOUR NEW NORMAL. Don't let circumstance dictate where your company will be tomorrow...YOU decide. Where will you be in 90-days, 1-year, even 5-years down the road?

Take control of your situation
Harness the collective wisdom of your people
Create focus, alignment, and accountability around your financials
Execute with a sense of urgency
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Topics: Open-Book Management, Transparency, Contingency Planning, Community, coronavirus, capitalism

Authors of our latest book, Change the Game: Saving the American Dream By Closing the Gap Between the Haves and the Have-Nots. Jack Stack is president and CEO of SRC Holdings Corporation. Stack, a graduate of Elmhurst College, came to SRC in 1979 as the plant manager of International Harvester (IH). In 1983, Stack and the SRC employees bought the company from IH and have turned it into what Inc. magazine has proclaimed “one of America’s most competitive small companies.” He is the author of the books, The Great Game of Business, A Stake in the Outcome, and Change the Game. Jack has been called the “smartest strategist in America” by Inc. Magazine and one of the “top 10 minds in small business” by Fortune Magazine. Darren Dahl is an experienced ghostwriter and business journalist, having written for publications like the New York Times, Inc., and Forbes, Darren has also ghostwritten multiple books, several of which have landed on multiple bestseller lists.

About The Great Game of Business

Our approach to running a company was developed to help close one of the biggest gaps in business: the gap between managers and employees. We call our open-book approach The Great Game of Business. What lies at the heart of The Game is a very simple proposition: The best, most efficient, most profitable way to operate a business is to give everybody in the company a voice in saying how the company is run and a stake in the outcome. Let us teach you how to develop a culture of ownership, where employees think, act and feel like owners.