Michael Erath on the Implosion of Two Businesses and Rising Again

The fear that keeps most entrepreneurs up at night is the nightmare that Michael Erath lived through. When the housing market crashed in 2009, Michael lost everything. Due to a combination of declining sales, betrayals from key staff, and his own blind spots, he went from owning two multi-million dollar businesses to almost destroying his marriage, losing his home and companies, and struggling to make ends meet.

But he learned from his mistakes and rose back to success. Today he owns multiple successful businesses, built on the EOS model. One of his businesses is SMART Direction, where he works full-time as a Certified EOS Implementer.

Michael’s journey inspired him to help others avoid the mistakes he made by writing his first book, RISE: The Reincarnation of an Entrepreneur. In RISE, Michael recounts his remarkable story to help business leaders learn from his mistakes—and successes.

We sat down with Michael to talk about his book and the lessons he’s learned. Here’s what he shared with us.

The Fall and Rise of an Entrepreneur

Traction Tools: You have quite a story to tell. Could you briefly give readers a preview?

Michael Erath: I grew up in a family manufacturing business, manufacturing hardwood veneer. I took over the business from my father in my late 20s. We were an $8 million company and I grew it to $18 million.

In 2006 I took the company through a $6 million capital expenditure project to retool the factory. At the time, the debt service was not an issue, but in November 2008 our revenue fell from $1.5 million per month to less than $500,000. As we plummeted towards insolvency with such a dramatic decline in revenue, I soon had to negotiate with the bank to unwind the business outside of bankruptcy.

At the same time, I had a separate business I had started 8 years earlier with a partner who had also become my best friend. We traded hardwood logs and exported them all over the world. The business had grown from a startup to $27 million, and I stepped out of the day-to-day of the business in 2003 and was essentially the financial partner. My other partner was the managing partner. As I was unwinding the family business in early 2009, I learned that he had been committing bank fraud and embezzling from the company. So that company imploded in a spectacular way.

I spent four years helping the U.S. Attorney’s Office prosecute my former best friend and partner. He ended up spending two years in Federal prison as a result, and I was completely wiped out. By 2010 I had lost everything.

TT: In your experience, how different is your story from thousands of other entrepreneurs out there?

Michael: The technicalities are very unique, but if you look at it from a high level, it’s very similar. Most entrepreneurs that I talk with have experienced a string of successes and failures. And over time, you’re gradually moving up, but it’s a wild ride along the way.

I try to approach my failures in a very vulnerable and open way—sharing my story in the hope that doing so will help somebody else. Because what I find is that most entrepreneurs are very embarrassed to have any failures or what they consider to be weaknesses. What I’ve realized, however, is that the more I talk about it, the more people resonate with it, share their stories, and have been through similar circumstances.

TT: You’ve got the technicolor story, so to speak, but it sounds like there are root issues that are common to other businesses’ experiences. When you boil it down, what was the root cause of the problems you dealt with in your first two companies?

Michael: It’s ironic, because as an EOS Implementer, we teach that most of these issues we face are symptoms of a weakness in Six Key Components of your business. So, going through the EOS model, in my past businesses, we didn’t have a clear and well-communicated Vision. We didn’t have authentic Core Values to really define our culture and help us determine who should be part of the company and who was not a good fit. We didn’t have a three-year picture or a one-year plan. We were just always fighting for the next quarter, because that was when we had to report numbers to the bank. And so we got this very short-sighted focus that prevented us from making clear, strategic long-term decisions.

We didn’t have a tremendous amount of clarity around roles in the organization. So we had a lot of duplicate accountabilities that led to confusion.

We were inconsistent with how we managed our data and we didn’t solve issues well. We dealt with symptoms rather than underlying issues, so the symptoms kept recurring.

We started to focus on process late, but it wasn’t the high-level processes that we needed to focus on. So there was a lack of consistency, and we just didn’t have all the pieces fitting together well to lay a strong foundation. When the economy started going south, everything began to collapse.

TT: And yet it sounds like you had a foundation outside of the company. Your family and your faith were huge for you during your darkest days. What did you learn from that?

Michael: One of the things that was helpful for me was always keeping an eye on the long game. Especially when you get pulled into survival mode. It’s very easy to focus solely on what’s in front of your face. Most of us as entrepreneurs become emotionally attached to our businesses, and when we’re in crisis mode and we’re emotionally attached, it tends to cause us to make less-than-rational decisions.

So it was important to me to step back and assess what mattered to me, and the importance of my family and doing what was right for my family in the long term—and how that may or may not interplay with what needed to happen for my business.

So having that clarity helped me make some decisions. For example, not throwing the family manufacturing business into bankruptcy. I made the painful sacrifice of going through an orderly liquidation. It cost me time in terms of getting my next business started, but in the long run it was better for my family that we did it that way.

TT: It sounds like you learned a lot about how to hire the right people—and maybe how to fire the wrong ones. How have your hiring and firing practices changed?

Michael: I’ve found that I’m a lot slower to hire than I used to be, and I’m also a lot faster to fire when someone isn’t a fit. I used to allow myself to be seduced into hiring somebody because of what I thought they could bring to the company in terms of helping us grow our sales. So I tended to focus much more on whether they could do the job and if they had the right experience. If so, I just plugged them in. As a result, we had tremendous misalignment with our underlying values, and that led to a lot of issues—people not being aligned with what we were trying to accomplish, or people protecting their jobs and just looking out for themselves.

I think I’ve also become very aware of the value of painting a clear picture of what life would look like if a candidate were to become an employee. And I do that in the interview process with them, almost from a standpoint of trying to unsell them on taking the job. Because when I do that, the people who really resonate with the values and really are the great candidates—they tend to separate themselves from the rest. And they, much more often than not, work out to be fantastic employees.

TT: You’ve mentioned what a difference EOS has made in the way that you do business. It sounds like EOS not only gave you the right processes to run a healthy company, but also equipped you to understand yourself better.

Michael: There’s a great quote from Ben Franklin in his book Poor Richard’s Almanac. He says, “There are three things in this world which are incredibly hard. One is diamonds, another is steel, and the last is to know yourself.” And that’s really spoken to me as I enter the second half of my life. To be truly successful and grow as a leader, it’s important to be able to look in the mirror and self-assess what we need to change, rather than to just push everybody else to change.

When I was first going through the EOS process with one of my manufacturing businesses, I focused on what everybody else needed to change. But I later started to realize that I had things that I needed to change for myself. And the more I’ve focused on that, the better leader I’ve become and the better my employees end up becoming as a result.

TT: Any final thoughts for entrepreneurs?

Michael: Sure. I often run into a lot of people who read my story and they come up to me and tell me, “My gosh, I’ve got a similar story, I’ve got to tell you about it.” And I find out that they haven’t told anybody about this because they’re embarrassed and they don’t want to share it.

But I also talk to people who are early in their entrepreneurial career, or they just haven’t been through such hardship yet. And I find out with these people, this is what keeps them up at night. “My God, what if this happens to me?”

What I often remind them of is a great quote from Bill Gates: “Success is a lousy teacher, because it seduces smart people into thinking they cannot fail.” So if you’ve suffered failures, learn from it and take those lessons forward. But also be vulnerable and open, and share your story with other entrepreneurs. Because you may help somebody in a way that you never would if you don’t share your experience.

Also, if you haven’t had those failures yet, remember to focus on that quote from Bill Gates. Always keep your guard up. Always be disciplined and focused. There are always chinks in your armor that you have to be aware of to make yourself and your organization better and stronger.

TT: Excellent. Michael, thank you for your time.

Michael: Sure, absolutely.

Are You Ready to RISE?

Michael’s story is both an encouragement and a lesson for every entrepreneur. RISE is a must-read for every business leader who wants to build their business on a foundation that’s reliable enough to truly support their company.

Get RISE on Amazon.