Barry Minkow: Self-Made Millionaire to Bankruptcy

Topics: Balance sheet, Barry Minkow, Financial ratio Pages: 10 (3830 words) Published: March 4, 2007
In a recent interview with Steve Kroft of CBS News (60 Minutes), Barry Minkow, the founder of ZZZZ Best Carpet Cleaning Company said "I started with the best of intentions, really I can say that. And when economic pressure reared its ugly head and I couldn't make payroll, I lied and stole and cheated." Prior to declaring bankruptcy, ZZZZ Best was one of the hottest stocks on Wall Street and Barry Minkow was known as the boy wonder of Wall Street. As the youngest CEO of a $300 million company Barry Minkow was the American Dream come true: a self-made teenage millionaire, the subject of flattering magazine profiles and a guest on Oprah Winfrey Show. At its peak, ZZZZ Best had 1400 employees at 23 locations in three states. What went wrong? In 1981, Barry Minkow started the ZZZZ Best at the age of 15 while he was a sophomore in high school in his parent's garage. He was introduced to the carpet cleaning industry at the age of twelve by his mother, who worked as a telephone solicitor for a small carpet cleaning firm. Due to the lack of barriers to entry in this industry (no licensing requirements, no apprenticeships to be served and only minimal start-up capital needed), it is not hard for anyone to start a carpet cleaning company. But at the same time, no barriers to entry meant that there was a cutthroat competition within the industry and it was not that easy to run a profitable company. In the early months, Minkow realized that though it was not easy to start a carpet cleaning company, it was even harder maintaining the business due to customer complains, collections, bad checks and impatient vendors demanding payment. At that point Minkow knew that if he wanted to survive in the industry, he would need working capital. He went to various banks, but due to his age and the fact that ZZZZ Best was only marginally profitable, local banks refused to loan him any money. As a result, Minkow decided to come up with his own ways to finance the growth of his business: check kitting, credit card forgeries, and staging of thefts to fleece his insurance company. So when he could not meet payroll, he would steal checks and deposit them in his bank account. He would kite checks, overbill customers and overdraw his checking account. He would do whatever it took to stay afloat. His age and his personal charm allowed him to get away with a lot of things. What actually made him believable was his verbal ability. Minkow was a smart kid and he realized from early on the benefits of an extensive social network of friends and acquaintances. For example, he became friends with Tom Padgett, an insurance claims adjuster, for his own benefits. He promised to pay Tom $100 per week if he would simply confirm over the telephone to banks and any other interested third parties that ZZZZ Best was the recipient of occasional insurance restoration contracts which included minor remodeling work on properties damaged by fire, storms or other catastrophes. The majority of the fraud was concentrated in ZZZZ Best's sales and receivables. Initially, these contracts, which were totally fictitious, helped generate paper profits and overstate the revenues to convince bankers to loan him money. Thanks to his phony financial statements he successfully got the money he needed from the banks and expanded his operations by opening several carpet cleaning branches across the San Fernando Valley. Minkow soon realized that the insurance restoration business was the segment that dictated the profitability of the company, so in a short period of time, insurance restoration, rather than carpet cleaning, became the primary revenue source for the business. During 1985 and 1986, ZZZZ Best reported undertaking several large insurance restoration projects. The company reported high profits from these restoration jobs. Minkow's defamations did not stop there. He started using the phony financial statements to attract private investors, but even that was...
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