Flawed Safeguard Sinks Security Company
THE BUSINESS: Security-guard services
CLOSED: March 1999
PRIMARY CAUSES OF DEATH: Failure to diversify adequately; thin capitalization
When JWA Security Services Inc. won a two-year contract from the state of California six years ago, Jon Wroten had every reason to celebrate--and to start worrying. On the one hand, the bonanza of $4 million worth of new business propelled his security-guard company, based in Sacramento, onto a fast-growth track. On the other, the lopsided size of the contract relative to JWA's roughly $1 million worth of other business meant that the company would run the risk of relying too heavily on a single customer.
But security, after all, was Wroten's business. And he didn't forget the security of his company's bottom line. To safeguard against a possible loss of the state contract, he diversified. Among the more than 100 customers that he lined up during the next five years were the Sacramento County Sheriff's Department and Sutter Health, one of the country's leading health-care networks.
Despite Wroten's prudence, when JWA did lose the California contract, in early 1999, the blow hit the company like a tornado. "We foresaw the problem of losing state business," notes Earl Roets, JWA's former vice-president of operations. "We just didn't foresee the extent of the impact."
Wroten, a former sheriff's deputy who had earned a bachelor's degree in political science, had started JWA with $225 in 1981. For the first nine months he was the sole employee, working nights as a security guard at a McDonald's restaurant. By 1991, the company had annual sales that surpassed $1 million, and it employed more than 100 people.
Bolstered by the California contract, Wroten launched a rapid-growth plan that he envisioned would bring in revenues of $100 million by 2002. At its peak, in 1998, according to Roets, the JWA family of companies encompassed security and temporary-staffing services, generated more than $50 million in sales, operated one office in Colorado and 13 offices in California, and had a payroll of about 1,000 employees. Its sizzling growth earned JWA a ranking on the Inc. 500 list of America's fastest-growing private companies in 1996 (at #486) and in 1997 (at #282).
Wroten attributed much of his success to a knack for managing employees ("We treat our employees with respect and dignity," he told Inc. in 1997), but he acknowledged being "plagued" by a lack of capital. To fund the rapid growth, he factored his accounts receivable with Imperial Bank, based in Los Angeles.
Selling receivables in that way typically is much more expensive than a bank loan is. Meanwhile, a thin profit margin on the company's contract with the state, which paid some of its bills as late as nine months after JWA's services were rendered, aggravated the company's woes. So in bidding (unsuccessfully) in January to renew the California contract, Wroten sought a higher price. The loss of the state business alone wouldn't have brought JWA down, says Roets. But in what proved to be the fatal blow, Imperial Bank, in March, ceased factoring JWA's invoices.
Wroten, now 42, who didn't respond to recent requests for an interview, closed the Oakland office and held off paying rent and utilities--to no avail. JWA's March paychecks bounced. On March 19, JWA and five of its six related companies, which were still clamoring for a total of $1.6 million in receivables, filed for Chapter 7 bankruptcy. "Things were going well," Roets says wistfully. "If we'd just had a few months' grace period to collect that money, JWA would be fine now."