Lared's work wasn't completed with the negotiation of the alliance. It has a vested interest in assuring that things work smoothly. "They're regularly in touch with Medrad and with us, so if there's any unhappiness, they will intervene," Cambon says. "They'll get us to sit down and talk."
Medrad, too, agreed to a success-sharing deal with Lared Group last year. Serendipity in the research lab had brought it a new product it was unprepared to produce and market on its own. The company designed prototypes for two radon-detection devices, one of which could be developed into a $150 instrument for home owners. Unlike products now on the market, Medrad's device would remain inside the house and give continuous readings.
The Lared Group began looking in Europe for a manufacturer that could take worldwide rights outside North America. Its work proceeded in three stages, each tied to a separate fee. The first stage was a quick analysis of the European market to determine demand, for which Lared received a set payment. The second stage, also for a set fee, involved a deeper analysis and the identification of a Swedish company as a potential partner.
The final stage, still going on, is the negotiation of a strategic partnership between Medrad and the Swedish company. If the alliance goes forward, Medrad will pay the Lared Group 5% of sales the first year, 4% the second year, and so on until payments cease following the fifth year. "I wanted them to be looking at the size of the deal," Medrad's CEO Tom Witmer says. "Their reward is directly parallel to our reward: the bigger it is for us, the bigger it is for them."
Life in the success-sharing lane isn't always so agreeable. One of Lared's deals, with a biotechnology company in California, went bust at the last minute. Lared had found an Italian company that agreed to distribute the biotech firm's new medical-diagnostic tests. A few days before completion of the agreement, some investors on the company's board decided to sell the company instead, voiding the deal.
It was a bitter lesson for Segil and Fontana. "Some silent interests on the board don't come out until the deals are on the table," Fontana says. Adds Segil, "We don't evaluate things anymore on only the rational issues of the deal. We want to make sure the venture capitalists and other board members are on the same track."
If that sounds like a big risk, Segil says it is preferable to another type of risk -- that, after years of building a company, she won't have many assets to sell in the end. "You can never really have a secure business when you're only on a fee-for-service basis," she says. "Success sharing gives security and stability to your company."
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REVENUE STREAMS
How to judge a long-term deal
Instead of billing all of their clients by the hour or with flat fees for particular projects, the Lared Group's Larraine Segil and Emilio Fontana are experimenting with "success-sharing" arrangements. They take a percentage of the additional sales their clients make as a result of their recommendations, and this income stream is for a set number of years. Segil and Fontana have discovered a few things you should consider with such deals:
* Cash flow. Be sure you have a healthy flow of fee-for-service business to back up success sharing. Otherwise, stretching receivables over a period of years could give you cash-flow problems.
* Quality of client's business. Choose your clients carefully -- their success is what ensures your own. And don't look at their product alone; their skill at managing is just as important.
* Size of client. You're likely to be wasting your breath if you try to convince large companies to buy into success sharing. New and small companies, however, are apt to be attracted to such deals.
* Top management's view. Be sure those at the top in your client's business, including the board, are amenable to the idea. Otherwise, the deal could collapse at the eleventh hour.
* Your costs. To protect yourself if the deal does fall apart, build in guaranteed payments for expenses and minimum retainer fees.
* Future relationship. Build a continuing relationship into the agreement, so you can get involved in the future to help resolve problems.
POINT/COUNTERPOINT
What the experts think about Lared's success-sharing strategy
PHIL DAWSON
Partner at Calfee, Halter & Griswold in Cleveland, specializing in succession planning.
Receiving a client's fee over time isn't necessarily a good thing. If the option is to get the same amount -- the $100,000 fee -- now or over three years, the Lared Group would be worth less to an acquirer if it received the money over a three-year period. The money will be worth less in three years, and there is always the chance that the Lared Group won't get the money at all. After all, the creditworthiness of a client can deteriorate over that long a time.
On the other hand, I can see two circumstances in which success sharing would raise the value of the company. First, if it can get a significantly larger fee through success sharing than it could through a fee-for-service arrangement and, assuming the risks are reasonable, the increased revenues will be attractive. Second, if success sharing enables it to reach a market that couldn't afford its services otherwise, then that too will add to the company's growth and hence its value.
JEFFREY C. WALKER
Managing partner, Chemical Venture Partners, a $300-million buyout and venture capital fund.
From the standpoint of someone thinking of purchasing the Lared Group, it's comparable to buying a venture capital portfolio. You have to evaluate every success-sharing deal they've done and see how each of their clients is doing. Two consulting companies with different success-sharing portfolios could be worth very different amounts, based on the quality of their portfolios.
The success-sharing revenues will tail off in future years, so a prospective purchaser still must rely primarily on the continuing efforts of the principals when figuring out a fair price for the company. But if the success-sharing portfolio is strong, that should make it a more valuable company.
