Inc Query

In times like these, certain issues rise to the top of the heap. This month we have questions about dealing with the emotional side of layoffs, raising start-up money, and pricing for profit.

But What About My Employees?
As the CEO of my own ad agency, I know what Norm Brodsky means when he talks about the awesome responsibility CEOs have for the lives of their employees. (See " Groundhog Day," July 2001.) With advertising so slow right now, I wake up at 4 a.m. thinking about my people and their children and what's the best way to take care of them if things don't turn around soon. From a personal standpoint, I wouldn't mind down-sizing, but I worry about the vendors, the clients, and especially the employees I'd be letting down. Of course, it will be worse if we go out of business. Can you give me any advice about dealing with these issues? Are there any books that might be helpful to someone in my situation? --Susan

Although it's probably not much consolation, you certainly aren't alone. We've talked to hundreds of CEOs in the past few months, and many of them are struggling with the same issues that keep waking you up in the middle of the night.

While there are obviously no easy answers here, we thought it might be helpful to hear from a couple of veteran entrepreneurs. "I understand what Susan is going through," says Martin Babinec, founder and CEO of TriNet, in San Leandro, Calif., a 13-year-old, five-time Inc 500 company with 280 employees. "I've had to lay people off on more than one occasion, and those decisions were among the hardest of my life.

"But an odd thing happens as you struggle with the decision. It forces you to ask fundamental questions about why you're in business. What are you working for? What will the business be like in 5 or 10 years? How will people in the company benefit from its long-term success? Is that worth the sacrifices and hard decisions you have to make along the way, including those that cause pain for others?

"Because let's face it: you can't build a successful business without making some decisions that hurt other people. That's just the way it is. As the CEO, you're respon- sible for the future of a whole community. And the bigger the business gets, the more often you'll have to choose between the community's best interests and those of individual employees.

The bigger the business gets, the more often you'll have to choose between the community's best interests and those of individual employees.

"So are you ready to make those decisions in order to achieve the vision you have? If the answer is no, that's fine, but don't prolong the agony. You and everybody else will be better off the sooner you ease out of the business and find another occupation."

We also turned to Ari Weinzweig, who is an avid reader of business books in addition to being the cofounder and CEO of Zingerman's, a $13-million, 19-year-old com- munity of food businesses in Ann Arbor, Mich. "Part of Susan's problem may be that she's carrying the burden all alone," he says. "That happens when you have a parent-child relationship with employees. The CEO winds up feeling as though she has all the responsibility for protecting jobs, which doesn't work well in my experience.

"Susan might benefit from bringing her people into the process of figuring out what to do -- which can be a challenge. I'd recommend she read Stewardship, by Peter Block, which deals a lot with establishing peer-to-peer relationships instead of tra- ditional parent-child relationships. Susan might also look at Flight of the Buffalo, by James A. Belasco and Ralph C. Stayer, or some of the books on open-book management. Those resources would help her think about a business solution, assuming she has time to find one.

"As for the personal side of the struggle, I'd recommend The Corporate Mystic, by Gay Hendricks and Kate Ludeman. Don't be put off by the title. The book does a good job of blending personal and business issues -- and may help Susan understand where her responsibility begins and ends."

The Money Hunt
I recently opened my own jewelry-manufacturing business after working for someone else for 10 years. I have to say I had no idea that the start-up was going to be so tough financially and emotionally. I've applied for loans without success. The banks I've gone to won't even consider lending money to anyone who hasn't been in business for two years. But if I could last two years without the money, I wouldn't need a loan in the first place. Are there any financial institutions that will lend me the $30,000 I need to get started? --Jackie

Probably not, unless you qualify for assistance through a government program. "I would start with the Small Business Administration," says Sam Kaplan, president of Central Chase Associates LLC, in New York City, who has helped raise money for dozens of start-ups, including several of his own. "Somebody there can help Jackie figure out whether or not she's eligible for one of the federally subsidized loan programs. She should also check with her state's economic-development office, which might have other programs to help companies like hers.

"But no bank in the world is going to lend $30,000 to a manufacturing company with no history, being started by someone with no business experience and no collateral. I hate to say it, but it's true. To raise that amount of money, people generally take out second mortgages on their homes or go to friends and relatives. Then again, three or four credit cards would also do the trick, and some cards have relatively low interest rates right now. But a government program is probably Jackie's best bet."

Perils of Pricing
I've written to many experts for advice and never received a reply. I always thought my mistakes were so simple and dumb that the experts didn't see any point in getting back to me. But I've come to realize that we all make mistakes starting out, and some of them are harder to get over than others.

Pricing, for example. When I began my manufacturing business, I based my pricing on what I'd want to pay for a product as a consumer. But after making the product, I had to sell it to a distributor, who then sold it to a retailer. Being a novice manufac- turer, I was very surprised when I discovered there was nothing left for me.

It's embarrassing to admit that, but I suspect many entrepreneurs fail because they make the same mistake. Now I have to raise my prices significantly if my business is going to become something more than an expensive hobby. I know I'm going to lose sales, but what's the alternative? Earnings simply aren't in the picture at this point.

So here's my question: Are there rules of thumb for determining how much the distributor should make and what the retail price should be? --Herb

Yes, there are, and no one knows them better than Chuck and Greta Sussman, who routinely used those guidelines to decide which products their three-time Inc 500 company, Pretty Neat Industries Inc., would manufacture. "Herb's mistake is a common one, and he shouldn't be embarrassed to admit it," says Chuck. "A lot of people base their pricing on what they think a product should sell for and forget about the cost of making it.

"So it's important to start with at least a rough idea of the manufacturing cost. Then you can figure out how much you need to charge the distributor to make your profit and how much the distributor and the retailers need to charge to make their profit. Remember, the product won't fly unless everybody in the chain can earn a reasonable return, but neither can the retail price be so high that no one will buy it.

"So let's say we determined that a new product would cost us $2.25 to manufacture, including materials, labor, manufacturing overhead, and machine time. We'd charge the distributor twice that amount, or $4.50. That may sound like a big markup, but you have to allow for office overhead, sales commissions, and profit, not to mention unforeseen expenses such as extra freight allowances or extra advertising costs.

"The distributor would want a 25% gross margin (that is, a 33% markup), which means the retailer would have to pay $6 for the product. The retailer would then want a 40% gross margin, making the retail price $10. The question was, Would the product sell at that price? If the answer was no, we wouldn't go ahead, no matter how great we thought the product was -- unless we could figure out how to reduce the selling price, say, by marketing the product directly to the retailer.

"Of course, you can also work the other way. If you know what the product will sell for in the store, you can figure out the price to the distributor by deducting 50% from the retail price and then another 10% from the balance. With a $10 product, for example, you'd deduct $5 and then 10% of $5, or 50¢, and come up with $4.50. So as the manufacturer, you have to decide whether you can earn enough profit at that price to justify going ahead with production.

"However you approach it, you can't let emotions cloud your decision. I had a sign over my office door that said 'Never fall in love.' A lot of people fall in love with a product and overlook the pragmatic part: you have to be able to make it and sell it at a profit."


Could you use some advice from an experienced entrepreneur who's been where you are and has figured out what works and what doesn't? Send your questions to Editor-at-large Bo Burlingham, aided and abetted by Street Smarts columnist Norm Brodsky, will find the best people around to answer them. And if you don't like the answers -- well, you can tell us that, too.

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