I'm being pressured to make a quick decision about selling the rights to a pain-relief lotion I've developed. Unfortunately, I have no idea what I should be asking for. The lotion has been effective in treating myself and some of my patients. With the thought of selling it commercially, I contacted an entrepreneur profiled in Inc. who had done something similar. He introduced me to another person he felt could help me. I sent this second person a sample of my product, and he became quite excited about it. Three weeks later, he sent me an e-mail offering to buy half the business. He wants an answer right away. How should I proceed? And how do I value a business built around a product that is less than two years old and has sales under $5,000?
There's a general rule to invoke whenever someone pressures you to hurry up and decide: Don't do it. I have never made a mistake by holding off and thinking through the best course of action. I have made many, many mistakes--including a couple that put my first company into Chapter 11--by rushing into decisions before I'd given myself a chance to consider all the relevant issues.
The writer--I'll call him Richard--had already made a key mistake in his eagerness to cash in on his new lotion. Even though he'd been told the product wasn't patentable, he'd sent a sample without first insisting that the recipient sign a legally binding nondisclosure agreement. So he has no protection against the possibility that his would-be partner might reverse engineer the product and manufacture it without Richard's authorization.
As for the value of the business, it has none--because it isn't a business. A product is not a business. You also need customers and sales. Richard has investigated how much it would cost to produce and package his lotion, and from that, he has come up with a wholesale and a retail price for it. But he has no idea whether anyone would buy it at that price, let alone how it would be marketed and distributed.
I advised Richard to send his suitor a nondisclosure agreement and refuse to discuss anything until it is signed. Only then should he take the next step of pinning down exactly what the suitor has in mind, what his financial resources are, and whether he can be trusted to deliver. In the meantime, Richard should research companies that specialize in marketing the inventions of others. And he should tread carefully, as this business is full of scam artists. But there are also companies with good reputations, and Richard should at least find out who they are and how they operate.