Cashing in when Selling Out
My husband and I are majority stockholders, and we plan to sell our business within three years. We have only two active minority stockholders, and we feel that the four of us deserve some additional bonus or benefit at the time of the sale since we will most likely be the prime movers in the sale. How do we handle this situation?

Name Withheld

* * *

Quickly is best, since your management skills (not to mention the economy) could sour and your key managers could vanish in three short years. If right now you begin to build up the company's value, its price tag in 1997 could be much higher than it is today. "It would seem that the additional value is the 'bonus' for the additional efforts," observes Mike Cohn, author of Passing the Torch (McGraw-Hill; call 800-422-3883, operator 6, $15).

But your wish is to reward four key people with part of the purchase price in a way that's disproportional to ownership. In this case your best bet, experts agree, is to establish a nonqualified deferred-compensation plan for yourselves. You'd need at least a 51% approval rating from your shareholders, depending on your state's law, your articles of incorporation, or your bylaws.

Broadly, here's how such a plan works: In each of the next three years, a portion of the excess future proceeds from the sale would be set aside in an account and marked as a liability on the balance sheet. When the business is eventually sold, you would immediately pay down any major obligations, then take for yourselves the accrued value of the liabilities of the deferred-compensation plan, and finally pay yourselves and the rest of the shareholders according to their individual ownership stakes.

A nonqualified plan has its pluses: "No annual report has to be filed; no ERISA [Employee Retirement Income Security Act] requirements need to be met. And the fact that the plan is discriminatory -- that it benefits only four people -- is perfectly OK," says Cohn. You don't need to file with the IRS, but you should let the Department of Labor know that the plan exists. It's an effective golden handcuff: anyone who leaves before the business is sold forfeits his or her deferred bonus.

A potential buyer would probably have no qualms about the deferred plan since the bonus could be written off come tax time, says John Brown, the founding partner of Minor & Brown, a Denver firm specializing in estate and tax planning. His book, How to Run Your Business So You Can Leave It in Style (AMACOM, 800-262-9699, 1990, $15.95), is full of practical tips on creating and preserving value in your business and on harmonizing your personal, financial, and estate-planning goals and your corporate objectives.

Of course, a deferred-compensation plan has its flaws, too. The annual payouts you'd receive would be treated as ordinary income, which is taxed at 36% (or even 39%), whereas profits from a stock sale are treated as capital gains and taxed at 28%. "The extra 8% to 11% has to be weighed against doing nothing and sharing sale proceeds that are proportional to ownership," says Cohn.

* * *

Home-Office Chutzpah
I've just started a financial-management company that serves general contractors, architects, and engineers. Should I tell potential clients that I'm new to this business and that I work from my home? If so, how do I get them to take me seriously?

Name Withheld

* * *

It's what you offer that counts, not where you offer it from. Your homegrown business is just as legitimate as one that's based in a downtown skyscraper. Besides, working from home is hardly a rarity these days. You're one of more than 24 million Americans (that's 20% of the entire adult work force) who are self-employed at home, a head count that's on the rise.

As you aim to attract customers for the long term, you want to be as up-front and upbeat as possible. Tell prospects confidently and matter-of-factly that you work from your house. "I've never lost a sale because someone 'found out' I was working out of my basement," says Bill Farquharson, founder of Advanced Form Systems, a $1-million forms brokerage he runs from his suburban Boston home. Of course, if you can't provide your prospective customers with the services they need, tell them that, too.

Don't kill your chances by opening a conversation with a blunt "I'm new to this business." "It sounds as if you're excusing yourself for your incompetence," says Georganne Fiumara, founder of the Mothers' Home-Business Network, in East Meadow, N.Y. Instead, present prospects with a professional personal-history sheet (no résumés, please), which details your prior relevant work experience. Follow up by pitching your value-added expertise and the virtues of your business's smallness. "You can be more flexible. Your low overhead will reduce their costs, and you'll be the authority, always there to serve them personally," says self-employment guru Sarah Edwards, coauthor of Getting Business to Come to You (Jeremy P. Tarcher, 800-788-6262, 1991, $10.95), a gold mine of smart marketing strategies.

Clients will take you seriously if you run your show professionally. Be sure you list a separate business phone number in the yellow pages, open a separate business account at your bank, and register your company with the secretary of state's office. Your promotional material should be of top quality; your office should be well organized. Dress up when meeting with even the most casual prospect. For an overview of how to work professionally and profitably from your home, Fiumara suggests you read Barbara Brabec's newly updated Homemade Money (Betterway/F&W Publications, 800-289-0963, 1994, $19.95).

For inspiring first-person accounts of how corporate refugees adjust to selling themselves, see "Do-It-Yourself Job Creation" (January, [Article link]). The feature also includes a resource box of organizations, on-line services, and publications at-home workers can use. To brush up on your presentation skills, pick up Joe Girard's How to Sell Yourself (Warner Books, 1988, $12.99).

To learn inventive ways of elbowing into the marketplace, you should network with members of the Mothers' Home-Business Network (516-997-7394; a 16-month membership is $35). To learn techniques more focused on your particular industry, join the Construction Financial Management Association (609-683-5000; an annual associate membership costs $150). On the local level, you'll raise your profile (and, with luck, generate business) by holding financial-management seminars for the trade associations of your target businesses.

* * *

Blues of a Broker
In 1993 my diamond-brokering business grew from $300,000 in annual sales to more than $1 million. I receive my merchandise on consignment and have to pay suppliers once a sale is confirmed. But cash flow is tight: I have to wait net 45 days for payment. How can I increase my chances of securing receivables financing?

Rick Kleinvehn

Owner

Wheaton Diamond Brokers

Streamwood, Ill.

* * *

If you're wondering if you can somehow use the consigned diamonds as collateral to secure financing for your brokerage, the answer is no. The diamonds aren't yours to pledge. But once you pay your supplier, you create a valid receivable that can be financed, explains George Dawson, founder of Borrowing for Your Business, a San Antonio banking consultancy to small businesses.

In the short run, you're well advised to master the art of collecting receivables. You'll find excellent resources and very effective company-specific strategies by checking out "Getting Paid" (Financial Strategies, August 1992, [Article link]), "Honey's Better..." (Financial Strategies, July 1993, [Article link]), and "How to Finance Anything" (April 1992, [Article link]).

The likelihood of securing receivables financing depends heavily on your persistence (read, your "I'm-not-going-away" attitude), your integrity, what type of clients you have, and the dollar value of your clients' individual transactions. If your primary customers are jewelry stores (with clean bills of credit), for example, and each sale is fairly large, then you should be able to find a specialty-financing company to advance what you need on a regular basis, says Dawson. If you're dealing mostly with couples who are buying rocks and having them set, then you might be able to work a deal with a personal-consumer-finance company. In that scenario, winning the lender's "yes" will hinge on the creditworthiness of the couple.

Your goal is to provide financiers with a sense of comfort that your receivables are sufficiently collateralized. "The higher that comfort level, the more receptive they'll be to your money needs," says Jeff Hurwitz, partner with KPMG Peat Marwick in Cincinnati. They'll begin to warm up to you if you can prove to them that your accounting procedures are above reproach. "General record keeping has to be above board, across the board," stresses Hurwitz. You'll also have to demonstrate that any risk on the receivable is adequately controlled. "Have a great receivables-tracking mechanism in place," says Hurwitz.

Understand that the banking world considers accounts-receivable financing a very specialized field. For that reason, you should ask your financial adviser for the names of secured lenders or factors that deal exclusively in jewelry or precious-gems financing. One source you should call is Fleet Precious Metals (401-278-6210), a subsidiary of Fleet National Bank, which can refer you to qualified lenders and credit bureaus in your area. You might also gather alternative financing ideas from members of the Association of Diamond Manufacturers and Importers (212-944-2066) and local jewelers' clubs.

* * *

Mexico After NAFTA
I will be traveling soon to Mexico on business. I was wondering if companies that conduct business there could tell me how Mexicans' attitudes toward business differ from those of North Americans. Have they been affected by NAFTA?

Susan Loveira

Human Resources Manager

Dataproducts

Simi Valley, Calif.

* * *

Mexicans are "hardworking, loyal individuals, respectful of the American culture but unique in their own cultural business ethics and standards," says Frank Jacobs, CEO of Falcon Products, a $65-million St. Louis maker of furniture for the food-service industry. Jacobs has been doing business in Mexico for 22 years, so he's accustomed to the slower pace and the more flexible attitude of his 150 Mexican employees (70% of whom have been with the company for at least 10 years). Even so, of Falcon's five factories, the one in Mexico has the highest production rate.

The fundamental difference is that business relationships in Mexico are much more personal (and they develop more gradually) than those in the United States. "You can forget power lunches and high-pitched presentations," says Walter Borisenok, CEO of Fortitech, a maker of vitamin premixes. Borisenok learned that while making three to four daily sales calls was typical in the States, one sales call a day was plenty in Mexico. Furthermore, the Mexican workday can last from 8 a.m. to 7 p.m. "Mexicans talk about their families and may even make a whole day of talking to customers," says Borisenok.

Because of that, there's a big advantage to having someone on your staff who's fluent in Spanish, even though many Mexican executives speak English. Borisenok's bilingual sales rep had few difficulties in getting to know the Mexican market firsthand. "The comfort level was there," says Borisenok.

Basically, the people of Mexico are pro-American; the ratification of NAFTA has not (yet) altered that leaning. Although some Mexican intellectuals may fear that Mexican distinctiveness will be lost as a result of NAFTA, the evidence is that "most Mexican businesspeople are elated," says lawyer Victor Mizrachi, chairman of Grady, Farley & Gerson's Mexico Practice Group, in San Diego. "They see NAFTA as an opportunity to join forces with American companies so they can finance their economic growth."

Cross-border business alliances are really starting to take hold as international trade increases. One example: Fortitech, which is strong in development and manufacturing, recently paired up with a Mexico City company that had 30% of the Mexican market and the requisite sales and distribution savvy. "Rather than battle for the number two spot, we brought together our capacities to hopefully become number one," says Fortitech chief Borisenok. "We look to them for the know-how on how to do business in Latin America." After teaming up, Fortitech expects a 40% increase in sales by 1995.

For general (and free) "flash facts" about Mexico and NAFTA, call the U.S. Department of Commerce's 24-hour automated service (202-482-4464). For more on the culture of Mexico from a historical perspective, Mizrachi suggests Alan Riding's Distant Neighbors (Vintage Books, 1989, $11). Another book, Jay and Maggie Jessup's Doing Business in Mexico (Prima Publishing, 800-255-8989, 1993, $21.95), includes a good overview of Mexico's political and economic climates. And check out the "Going Global: Mexico" insert in the October 1993 issue of Inc.

-- Reported by Karen E. Carney and Vera B. Gibbons. n