Tips on negotiating, overcoming seasonal slumps, giving up stock to investors, keeping employees from stealing customers, and coping with loneliness
Among the many E-mail messages I've received lately were several that raised issues we all have to face sooner or later. I decided to share some of them with you this month. I also want to thank everyone who has written in. Rest assured that I read all my E-mail messages. They are the engine behind this column.
Jerked around: For eight months I've been negotiating a licensing agreement with a company that wants to produce a toy I've invented. The process has been painfully slow. I'd send a proposal in; the company would ask for changes; I'd compromise; the company would ask for more changes; I'd compromise again. At one point we hit a particularly difficult issue, and my contact insisted on taking the contract to a lawyer -- who tore it apart. So we started all over again. After several more months of this, I thought we finally had an agreement. Then I received a fax demanding a whole new set of changes.
I couldn't believe it. I'm beginning to think that my negotiating partner isn't serious. At what point do I admit the deal isn't happening and move on to another manufacturer? --John
Dear John: You shouldn't be surprised at what's happened. Good negotiators always try to get the best deals for their company. How? By taking as many bites of the apple as the other party will allow. Your problem is that you let the other side set the ground rules of the negotiating process. You should have insisted up front on separating business issues from legal issues. In other words, you'd negotiate the business issues first, and the lawyer couldn't then reopen them.
As it is, you don't have much leverage. I'd advise you to tell your contact something like, "I'm sorry, but I've gone as far as I can at this time. I still think that your company is the best one for my product and that the deal we worked out would fly, but you're leaving me no alternative other than to look elsewhere. Not that I want to, and maybe I'll find out I'm being unrealistic. If so, I may come back."
If the guy really wants your product, he'll make you a reasonable proposal. In any case, don't ever close the door completely. In negotiating, it's always a mistake to paint yourself into a corner you can't get out of.
Seasonal nightmare: I have a three-year-old company that produces job fairs. We've had some success, but we're riding a roller coaster. Business is great for three or four months in the spring and again for two or three months in the fall. In between, there's nothing. Our cash flow falls to zero. Meanwhile, we still have to pay our employees.
We've tried attracting customers during the down months by offering discounts -- to no avail. The cash crunch gets so bad that we spend the good months just recovering. Any suggestions? --Kent
Dear Kent: First of all, I'd stop offering those discounts. You're lucky no one took you up on them. They could have undermined the profitable part of your business. (See "The Capacity Trap," August 1996.) Second, look for ways to diversify. Are there other types of shows you could produce in the down months? Could you do consulting during those times? Third, deal with the cash-flow problems directly. Can you negotiate to pay your leases during the months when you have more money in the bank? Can you speed up your collections when cash is tight?
You might also try explaining the problem to your employees and asking for their suggestions on ways to diversify and to improve cash flow during the downtimes. You might even set up a game around it -- with noncash prizes, of course. Employees can often come up with ideas you'd never think of.
Equity dilution: I'm in the process of launching a software company, and I've just about run through my own financial resources. I need to go outside for financing, but no one seems to be able to tell me how much equity investors will want for their money and how much I should be willing to give up. My goal is to go public in three to five years, at which point I'd like to own 51% of the stock, with employees holding from 19% to 29%, and investors having the remaining 20% to 30%. Are those numbers realistic? --Jeff
Dear Jeff: As a general rule, the amount of equity you have to give away depends, first, on the level of risk involved and, second, on how well you know the investors. If you go to venture capitalists for financing, it's unlikely you'll retain a controlling interest in your company. In fact, you might not remain in your company at all if you fail to deliver on your projections.
You have a somewhat better shot at retaining control with angel financing. Your best bet, however, is to use Rolodex financing for the next round -- that is, money from friends, relatives, and acquaintances. You may be able to get the funds you need in the form of a loan, or a loan convertible to stock, in which case you'll give up little, if any, equity.
Going public is another story. The underwriter will tell you how much stock you have to sell. I doubt that after the offering you'll still own 51%. Then again, you seldom need a majority of the stock to stay in control of a publicly owned company.
Stolen customers: You've often said that if you run your business right, departing employees shouldn't be able to take your customers with them. So what am I doing wrong? I give our salespeople a lot of freedom. After a year or two they walk off with the account. --Charles
Dear Charles: You might start by looking at your hiring practices. It sounds as though you could do a better job of spotting salespeople who want to be around for the long term. (See "Hiring for Growth," July 1998.) But you'll still lose people occasionally, so you also need to be proactive. You're asking for trouble if you're not regularly in direct contact with your customers. That's the only way to make sure a customer belongs to the company, not to the salesperson.
Listen, I give my salespeople a lot of freedom as well. But whenever we sign up a new account, my wife sends a personal, handwritten note to the customer, offering our thanks. I myself make a point of meeting with the decision maker at each large account at least once a year. With smaller accounts, I send personal letters, call from time to time, and occasionally drop by for a visit.
I give all our customers the same message: "I'm sure our people can handle any problem, but if they're not available, feel free to contact me directly. Here's my phone number." I'm careful not to step on the toes of our salespeople, and they're happy I'm so visible. My presence gives them a competitive advantage. They'd have only one reason to object: if they didn't really have the company's interests at heart.
The right price: Five years ago my father brought me into his company so that he could spend more time doing outside sales. Lately, he seems to be working less and taking more cash out. Once I was told I'd be given the company; now it turns out I'll have to buy it. I'm 30 years old. I want to grow the business, but I can't unless we start reinvesting our profits. So I guess it's time to make an offer. How do I avoid both insulting my father by offering too little and hurting myself by offering too much? --Robert
Dear Robert: Before you offer anything, you need to do some soul-searching and planning. I always advise people to start with a life plan. Where do you want to be in 10 years? Once you've thought it through very carefully, you should ask yourself, "What would it take for me to achieve my life plan if I stay in this company?"
The idea is to come up with an offer that will allow you to attain your life goals. You should probably do some research into the value of comparable businesses. You should also figure out what you can afford, given your expectations and needs. Then put together a proposal specifying how much you'd pay, when you'd start paying and over what period of time, how much salary your father could continue to draw, and so on.
You can't fault your father for wanting to sell you the company. He built it. He has a right to get something for it. But you don't necessarily have to buy it. In fact, you may eventually decide it's better to leave. Just make sure you can leave on good terms.
How? Once you have your proposal, sit down with your father and say: "Dad, here's what I want to do over the next 10 years. I think I can do it if I buy the company from you under these conditions. If you have other ideas, I'd like to hear them. I want to work something out that's good for both of us. I love you. I love the company. I'd love to stay here. But I need a plan that's going to let me achieve my goals." And you do, by the way. Otherwise, someday you'll be 40 years old; your father will still be alive, knock wood; and you'll be in the same position you're in today.
Loneliness: I have a personal problem and no one to share it with. Two years ago I started a food company that produces, distributes, and markets a specialty food item. The business started with a bang, but production problems turned it into a bust. I persevered and have come back stronger than ever.
My problem is procrastination, which may come from loneliness. I'm doing the business on my own, and I've just moved to a small town where I don't know anyone. I was the most popular guy in school. Back home, everybody wanted to be around me. Now I spend my evenings drinking alone. I'm having trouble coping. I'm desperate and feeling indifferent about my life. Am I normal? --Name withheld
Dear friend: I don't think normal is the issue here. In the course of life, we all get lonely and depressed from time to time, and starting a business is often a solitary process. But when you're feeling depressed, you need to go for professional help. I've been in counseling a number of times myself, and I've always come away better as a result.
Some people -- men especially -- feel there's a stigma attached to seeing a psychologist or a psychiatrist. That's wrong. I would never look down on anyone who sought professional help. On the contrary, I respect people for taking that step. It's a means of bettering your life. It gives you insight into yourself that you often can't get any other way.
As for procrastination, I'm also a procrastinator. The small issues, I find, tend to take care of themselves when you leave them alone. The big issues, and the most difficult ones, I try not to procrastinate about. I force myself to tackle them first and get them out of the way. They seldom turn out to be as bad as I expected.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc. 100 company and an Inc. 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available on-line at http://www.inc.com/magazine/columns/streetsmarts/.