At first, that attitude paid off. Local school boards, desperate to find a solution to their perennially leaky roofs, spurred demand. And once he had projects in the pipeline, Howard was able to pay off his investor. Back then, with little or no competition, recalls Bill Bilger, who joined Howard Roofing in 1994 to help with engineering and marketing, "it was easy to sell metal roofs." Annual revenue leapt from $201,000 in 1991 to $5.8 million in 1995 and to a peak of $8.5 million in 1998. That rapid growth rate--a compounded average of 71 percent a year--suited Howard just fine. He liked running a company with 120 people on staff, working from three offices and doing business in 12 states. "I was pretty cocky," Howard says. "We were growing faster than anybody."
In Howard's home office, filled with red-and-white Ohio State University paraphernalia, he keeps the plaque given to him at the Inc. 500 dinner 10 years ago. It's a bit dusty as he pulls it out of the closet, a stark reminder of the days when the company seemed at the top of the world. "I remember that time," he says, wistfully. "We had all these employees and the bankers liked us. Everybody liked us."
By the time the company appeared on the Inc. 500 list in 1996, operational troubles were brewing. By the following year, Howard Roofing had lost control of its cash flow. "We just grew like crazy and couldn't handle it," Howard says. "An entrepreneurial company takes on the personality of the entrepreneur. My perspective was that if we slowed down the growth, then we'd wither and die."
Others weren't so sure. "As sales outpaced the ability of operations to keep up," says Bilger, "there was dissension in the company--mostly over whether to keep growing at all costs." Howard tried to regain control with a management shakeup. First, he brought in Brian Hamilton, a newly minted Duke M.B.A., as a financial consultant. Then, in April 1997, he replaced his operations chief and hired the company's first controller. But the problems seemed to multiply. As competition sprung up, other contractors started putting in low-ball bids to get work. As a result, Howard Roofing got fewer retrofit projects and saw its business shift to new roofing, which it found less profitable. Construction is a notoriously low-margin business to begin with--Howard Roofing typically made just 3 to 5 percent, according to Howard--so there wasn't much room for error. "We weren't creating the money we thought we were," says Kevin Salvagni, who was operations chief from April 1997 until the business closed in 1999. In retrospect, perhaps Howard should have turned down some projects, but that wasn't his nature and, anyway, they were worried that if business slowed, the company's idled workers might defect to the competition. "Entrepreneurs don't want to think we have limits," says Howard. "I know that I am better at sales and marketing than at operations, but it hurts me to have someone say that."
In 1998, there was a series of cost overruns. Since Howard Roofing worked on large projects--a school roof can run $800,000 or more--an unanticipated cost overrun could become a sinkhole. "If we've got eight project managers, and they each lose $100,000, that's some pretty big pocket change," Howard says. "Everyone's feeling euphoric, but we're losing $100,000 a month."
He tried to get a handle on operations by tracking everything from how many people worked on each crew to whether equipment sat idle. "When your margins go down, your faults jump right out at you," says Salvagni. And by the end of 1998, things seemed to be improving operationally: The money-losing projects were ending, and newer projects were expected to be profitable. But even with revenue soaring to $8.5 million, the company reported a loss of $700,000, the first year it had failed to turn a profit. Unpaid vendors were calling Howard at home to ask about their checks. Short on cash but still wanting to expand, he began talking to outside investors.
As it turned out, though, Howard Roofing was in a lot more than just operational trouble. In August 1997, the company had begun skipping payments on its payroll taxes, which companies are required to deduct from employee paychecks and send to the government. Precisely whose decision this was remains a matter of dispute, but it gave Howard Roofing some $15,000 to $20,000 a week in extra cash. The IRS can be slow to catch nonpayments, and for some time nothing happened. But the debt grew, peaking at some $650,000 in late 1998. That put Howard Roofing among the nearly two million businesses (most small and closely held) that owed a total of $49 billion in unpaid payroll taxes as of September 1998, according to a General Accounting Office report. Failing to pay employment taxes is considered more serious than not paying income taxes because the money has already been deducted from salaries and employees receive credit toward Social Security and Medicare regardless of whether that money is sent in; the multiple penalties and interest assessed on these delinquencies can quickly destroy a business. "Everybody knew that we were having financial problems," Bilger says, "but nobody knew that the company had done anything [wrong]."
In cases like this, people tend to point fingers, and that's exactly what happened at Howard Roofing. In Chuck Howard's version of the story, it was the fault of Karl Beyer, his young controller. Howard says Beyer stopped sending payments to the IRS without telling him, and then tried to fix the problem by forwarding handwritten checks to the IRS signed with a signature stamp kept in another executive's drawer. Eight handwritten checks totaling some $600,000 were sent to the IRS. Howard claims he was kept in the dark about the tax troubles. He says the financial statements showed the tax debt as part of the company's overall payables, and he couldn't read them well enough to see any discrepancies. "He'd give me this mumbo jumbo," Howard fumes. "He physically gave me fake statements for 18 months. I gave them to the banks and the bonding companies and didn't know anything was wrong at all.…It just makes me want to go outside and vomit."
