Street Smarts | Inc.com

Everyone Fails. What's Key Is to Learn the Right Lessons

Norm Brodsky — Thu, 27 Jun 2013 10:00:00 -0400

Once you see that failure is normal, you'll improve the odds of success.

Dear Norm,

I am a serial entrepreneur in the food business. Over the past 11 years, I've started five pizzerias, a bakery, and a bagel shop. I opened my latest restaurant, a wood-burning pizzeria, last November. It ended up a spectacular failure. After four months of bleeding cash, I closed it down. The good news is that I have my other businesses to support me. Nevertheless, closing the business and losing the money hasn't been easy. How can I pick up the pieces and move on?

-Ian Gurfield, Madison, Wisconsin

When I spoke to Ian, he explained that he had been wildly overoptimistic in his sales forecasts for his new place. Actual sales came in 35 percent below his most conservative projection. By the fourth month, he could see that it would take a long time and a lot more money to reach breakeven. Instead, he decided to cut his losses.

I asked him what lessons he took from the experience. He said the restaurant had been a "passion project." His other pizzerias sell takeout pizza by the slice. The new one was a sit-down restaurant featuring gourmet pies baked in a traditional wood-fired oven imported from Italy.

He'd long dreamed of opening such a place, and when an ideal space for it became available, he jumped at the opportunity. The failure of the venture, he said, had taught him he should not let himself get so swept up in his passion for a project that he underestimates the risk involved.

I told him that was the wrong lesson.

In fact, Ian did nothing wrong. He started a business, and it failed. That happens. He was smarter than most entrepreneurs--including me--in that he got out early. When my first business, Perfect Courier, went bust in 1988, it took me three years to emerge from Chapter 11 and move on.

I told Ian not to be afraid of following his passions. Rather, he should realize that everything he touches is not going to succeed. That's a hard lesson for some entrepreneurs to learn, especially if they've known only success. But once you learn it, you can begin to take into account the possibility of failure when you try something new.

When Perfect Courier went under, it was because I kept throwing good money after bad until I landed in bankruptcy court. My response was to resolve that henceforth, when I went into a new venture, I'd estimate the investment in advance and allow myself to go 25 percent beyond it but no further.

Ian's situation is different. He branched out in part because pizzerias had become old hat to him. He had grown so good at launching them that he couldn't get excited about doing another one. So he looked for a new challenge.

If he'd considered the possibility of failure, he might have put off launching the restaurant of his dreams and instead spent his limited time and money expanding his chain of existing pizzerias. Once he'd built a substantial platform, he could have sold it or used it as a base to pursue new ventures.

That's the course I'd take if I were starting my entrepreneurial career today. I'd look for a business I could fully master. Then I'd keep replicating and expanding it until I had a platform large enough to support whatever else I wanted to do.

Ian has that opportunity in front of him. Whether or not he chooses to seize it, he can at least move forward with the knowledge that he's just received a valuable lesson. For that, he should be grateful.

Ask Norm: I Want to Pass My Company On to an Employee. What Should I Do?

Norm Brodsky — Thu, 30 May 2013 15:45:39 -0400

Norm Brodsky helps a business owner who wants to give a longtime worker a piece of the action.

Getting Ready for Growth

Norm Brodsky — Tue, 30 Apr 2013 10:00:00 -0400

Here's the challenge: Look to the future, but also stay focused on the present.

Every business gets built in stages. The challenge is to stay focused on the stage you're in--while preparing for the ones to follow.

We're dealing with multiple stages right now at Kobeyaki, the Asian fast-casual restaurant chain I'm building with three partners--Brian Kelly, Brian Konopka, and Sal Barrera. Our first restaurant, in the Chelsea neighborhood of Manhattan, has been a huge success. Now, we're moving on to the second stage: starting up two more restaurants in other parts of Manhattan.

But our goal is to go national. And to do that, we're going to need outside funding, probably from a private equity group. The question is, What should we do now to put ourselves in the best position to get the right kind of backing later? I didn't have the answer. So I took note when Brian Konopka mentioned that he knew Gary Levy at the CohnReznick accounting firm. Levy is one of the leading experts on the hospitality and restaurant business industries. "Can you get us a meeting?" I asked.

Levy generously offered us an hour of his time. By the end of the meeting, it was clear to me that he was exactly the person we needed to guide us through the next stages of the business. But for him to serve as our adviser, we'd have to hire him as our accountant. Brian Kelly whistled softly. "That could be really expensive," he said.

"Well, it's your call," I said. "But it seems to me his advice is worth it. You'll have at your fingertips whatever information you need to build this business." They agreed, and the investment began paying off almost immediately. Among other things, Levy answered my question about how we should prepare for getting private equity. "You need to prove the concept," he said.

"Will we prove it if we open seven profitable stores in New York City?" I asked. "Putting all of them in great Manhattan locations doesn't prove the concept," Levy answered. "They'll want to see if it works elsewhere. At least two of the seven should be outside New York."

After we discussed locations for a while, I asked him if he could get us a meeting with some potential investors, so I could ask them directly what they look for. He thought that was a good idea. "But not yet," I said.

I'm sure Levy could get us a meeting now, but I'd much rather wait until we're beginning to create buzz and look like a hot concept. I figure that will be after the three restaurants are up and going strong--maybe in a year. Meanwhile, we'll stay focused on Stage Two.

Don't Worry; Grow Happy

Norm Brodsky — Tue, 30 Apr 2013 00:00:00 -0400

Inc.'s Norm Brodsky talks about knowing when to walk away from opportunities that others consider can't-miss.

It's been two years since I decided to build a hotel in Tioga, North Dakota, and my, how things have changed. The state's oil-and-gas boom wasn't as far along or as famous back then as it is now, and I couldn't get any outside financing.

So I built the first Black Gold Suites with my own money. It opened just over a year ago and has been a roaring success from Day One. We made plenty of mistakes, but as I expected, our occupancy rate was so high that we were able to overcome the problems.

Last fall, we were ready to start on our second hotel, in Stanley, about 30 miles east of Tioga. By then, the whole world knew about the energy boom, and we had no trouble getting investors. That hotel will open in June.

Meanwhile, the market keeps getting hotter. Everywhere I go, people ask if they can invest in the next hotel. One gentleman, representing a group of potential investors, accompanied me in March when I visited a potential site in Watford City, 44 miles south of Tioga. I took a look with the investor, as well as my wife, Elaine, and my partners, Steve Finger and Ray Cody.

The site turned out to be almost 30 miles from the Watford City airport, at the intersection of two highways. The property owner was building a truck stop there and wanted a hotel nearby. I noted that there are already several hotels in town. The owner insisted we'd have no trouble filling rooms. "Every truck will have to stop here," he said. I pointed out that truck drivers generally don't stay in hotels. He was unfazed. "If you don't want to build here, no problem," he said. "I have 10 other guys waiting in line."

As Steve, Ray, and the investor talked excitedly about getting started, I held my tongue, but Elaine could see I was unconvinced. "You don't like it, do you?" she said when we got home. "No, I don't," I said. "This is how people get in trouble. When a market gets as frothy as this one, people overlook obvious risks and make questionable deals."

To be sure, I could build this hotel without any financial risk to me. And who knows? The hotel might succeed. But it's not a deal I would invest in, and I can't in good conscience ask someone else to do with his or her money what I wouldn't do with mine. But there are still great opportunities in North Dakota, so my search for another site continues.

When Not to Join the Family Business

Norm Brodsky — Thu, 25 Apr 2013 10:00:00 -0400

You always face the challenge of keeping your emotions from getting in the way of making sound business decisions. Those emotions are especially strong when you're dealing with family issues.

Dear Norm,

I grew up in a family business that I absolutely love. It's a butcher shop, and I'm the fourth generation. For many years, I tried to work with my dad, but we're both strong willed, and I decided to follow my own path and went for my M.B.A. Today, I work for a large financial institution. About four years ago, I moved back to Detroit to be closer to my family. I have been able to get more hands-on with Dad's business, and now he wants me to buy it. And I want to buy it. The problem: I make a nice six-figure income that I can't afford to give up. I also like working from home, as I do now. My dream would be to keep my job but buy out my parents so they'd have some money to retire on. I'd be in charge, but I'd let them continue to work part time. (My mom still runs the office.) The problem is, I have no idea how to value the business, pay for it, expand it, and run it from home.

--Jeff Evans, Marketing and Operations
Richmond Meat Packers, Richmond, Michigan

You always face the challenge of keeping your emotions from getting in the way of making sound business decisions. Those emotions are especially strong when you're dealing with family issues. I was worried that Jeff Evans was about to make a bad decision based on his emotional attachment to a business that has been in his family for four generations.

My specific concern had to do with Jeff's idea of trying to run the family business on a part-time basis from his home while keeping his full-time job as an account executive for a major financial company. In my experience, it almost never works to run a business like this one--a multigenerational mom-and-pop that relies on a personal touch--on a part-time basis. If you're not on the scene full time, seeing what's going on as it happens, you miss things that you should be factoring into your decision making. As a result, you wind up making mistakes that you could have avoided.

That said, Jeff was clear that the family business was his real love and that he would devote himself to it exclusively if he could afford to, something he cannot do at the moment. So the question is, Can he build the business to a point at which it is generating enough cash to employ him full time? I suggested that Jeff and his parents hire someone to work full time and execute a growth strategy they would come up with together. If it works, he may eventually be able to fulfill his dream. If not, they can at least get the business in shape to be sold, which would achieve his goal of making it possible for his parents to retire.

Don't Let Your Breaking Point Upend Your Goals

Norm Brodsky — Wed, 17 Apr 2013 10:00:00 -0400

This business has grown so well that the owner can't take it anymore. Should he hire an expensive manager?

Dear Norm,

I started my business seven years ago and have grown it to $3 million in sales. Our work is never-ending. We work every weekend and every holiday. Whenever it looks like we're going to hit a lull in the action, the phone rings for a last-minute job, and off we go. I've reached the point where I realize I can't handle any more myself. For the company to grow, I need to bring in a professional manager. These guys are expensive--$90,000 to $120,000 a year--and they don't produce revenue. I am having a difficult time figuring out what to expect when I spend that kind of money on a non-revenue-producing employee. I'm also having trouble getting my brain around the fact that this new hire would be the highest-paid person in the company. --Name withheld

Sooner or later, every growing business reaches a point at which the owner can no longer handle both sales and operations and has to decide which responsibilities to hand over to someone else. The mistake many people make is to base the decision on whatever problems they're having at that particular moment. Instead, they need to start by figuring out where they themselves want to wind up.

The writer of this query--I'll call him Josh--is having a hard time precisely because he is reacting to the stresses of the business rather than thinking about his personal goals. When I asked him what they were, Josh, who is 43, said he'd like to sell the company and start something new, preferably before his 50th birthday. "I'm not in a big hurry," he said. "I just want to get to the point where I feel it was worth all the effort."

"How do you measure that?" I asked.

"By money, I guess," he said. How much? "It depends on how long it takes, but I'd probably feel that $3 million or $4 million in cash would justify it."

That was a reasonable goal, given his business's growth rate and profit margins. More to the point, the information made it immediately clear what he has to do. To sell the business and walk away, he will need a team in place that can run it without him. Otherwise, any buyer--assuming he could find one--would probably insist that he stick around. So his focus has to be on building the team, and he should hire the new person with that in mind. Whomever he hires might or might not turn out to be the right person. If not, Josh will have to keep looking. But he can stop fretting about the cost. The right person will enable him to walk away in five years with $3 million to $4 million--which should more than justify his or her salary.

When Business Gets Boring

Norm Brodsky — Wed, 06 Feb 2013 00:00:00 -0500

You don't enjoy the work anymore, but retirement isn't all that far off. Chin up, or shove off?

Dear Norm,

I own a highway construction company that I started in 1997. We do $12 million to $15 million annually in sales and have never had an unprofitable year. My problem is that I don't enjoy the business anymore. I like the income I get out of it (about $165,000 a year) but not the work. I'm 52 and know I could tolerate it for the next 13 years and have a decent retirement, but would I be cheating myself?

One possibility is to sell the company. My three children have shown no interest in the business. But I do have a key employee who has been with me since Day One. I have discussed selling a portion of the business to him, and he wants to buy in. Should I sell to him and gradually phase myself out, auction off the assets, try to find an outside buyer, or grit my teeth and stick it out?

--Name Withheld

Boredom is an occupational hazard for entrepreneurs, and it can have unfortunate consequences if you're not careful. What's more, it can be very tricky to deal with on your own, leading you to make decisions you'll soon regret. The writer--I'll call him Joe--was wise to seek an outside perspective before doing anything drastic, like selling his business.

In talking with him, I could see that the business was doing much more for him financially than he appreciated. In addition to paying him a salary, the company covers a lot of his expenses, including his car, his insurance, his travel costs, and the money he spends on flying airplanes. (He is an avid amateur pilot.) If you add in his annual bonus, the whole package is worth closer to $265,000 than $165,000 a year. I suggested he sit down and tally up the value of all those perks, so as to have a more accurate picture of what the impact would be if he lost them.

I think that selling the business is a bad idea. Let's assume he can find someone to buy it at the appraised value of $3 million. By the time he finished paying legal and accounting fees, closing costs, taxes, and so on, he would wind up with barely enough money to support himself in his current lifestyle for a few years. Most of that money would be gone before he reached retirement age--especially if he used some of it to start another business.

Fortunately, Joe has an alternative, one that doesn't require him to spend 13 years doing work he no longer enjoys. First, he can turn over day-to-day management to his key employee, whom he wants to bring in as a minority partner anyway. Joe would continue to oversee the operation, but the move would free him up to start a venture. I urged him to choose a business related to one of his passions--say, flying. Joe liked that idea. In fact, he told me he'd already had some thoughts along those lines. So maybe he just needed reinforcement from a disinterested observer. We all do from time to time.

Norm Brodsky on the Upside of Having Setbacks

Norm Brodsky — Tue, 03 Jul 2012 00:00:00 -0400

Every business has problems. To build a business, you need to learn how to love the process of solving them.

A friend of mine recently visited me at CitiStorage, because he wanted to look in a box I'd stored for him many years ago. He gave the bar code to my assistant, and a few minutes later, the box appeared. "Wow," he said. "How did you find it so fast? That's amazing!" His comment made me think of all the changes we've made to our systems over the years, most of them in response to a problem. That's how every business expands—by fixing one problem after another. In going from the 27 boxes we started with in 1990 to the 4.5 million we have today, we've had to solve a ton of problems.

I've tried to keep that in mind while getting my latest business, Black Gold Suites, up and running. As you may recall, it's the first of three hotels I'm building in North Dakota, where the oil boom has brought tens of thousands of people to a formerly desolate region and created an acute housing shortage in the process. The resulting opportunities are great, but so are the problems.

For example, we've heard from other hotels that, in winter, strangers often sneak in behind guests at night—when the front desk is unmanned—and sleep in hallways. I don't begrudge anyone a warm place to sleep, but hotels that double as homeless shelters don't survive. So we're installing security cameras throughout the facility. Then there was the challenge of getting our gas and electricity hooked up. Although the utility company kept promising to do the work, nothing happened for months. Finally, we asked for a specific date and got one barely a month before the opening. When we asked what the holdup was, we were told there was a shortage of licensed workers—but not to worry: The ones we needed would soon finish their schooling and receive their licenses. "This is crazy!" I said to my partner, Steve. "What if these guys flunk out?" Fortunately, they passed.

Meanwhile, the cost of everything—real estate, labor, materials, deliveries—has skyrocketed. If we were starting to build today, it would cost at least $2 million more than we're spending just for the hotel construction. It would, that is, if we were allowed to build at all. There are already construction moratoriums in some cities, as the need for public services outstrips the government's ability to supply them.

So we obviously have more problems in our future. I can't say I look forward to them, but I do enjoy the process of finding solutions for them. As a wise man once said, a company is only as big as the problems it can handle.

Norm Brodsky on the Difference Between a Mentor and a Consultant

Norm Brodsky — Tue, 03 Jul 2012 00:00:00 -0400

How to find a mentor and what to expect from the relationship.

Dear Norm,

I'm at a point where I think I really need a mentor. I have a great staff, accountant, lawyer, and banker, but none of them has any experience as an entrepreneur. Though they help to balance my ambition and keep me grounded in reality, I need something more. My company isabout 10 years old, with just over $2 million in sales and a staff of about 25. I'm hoping we'll make the Inc. 500 this year. It would be great to have a successful entrepreneur I could turn to for guidance. Besides not knowing how to find one, I'm unsure how these relationships typically work. Do people pay mentors, give them bonuses based on performance, or seek advice purely on goodwill? And what expectations should I have for a mentor?

DELCIE BEAN, CEO, PARAGUS STRATEGIC IT
HADLEY, MASSACHUSETTS

Mentoring is a subject near to my heart. I had some great mentors early in my career, and in recent years I've been devoting well over half of my time to mentoring others. In the process, I've developed some strong opinions on the subject, which I shared with Delcie Bean.

First, I don't think you should ever have to pay a mentor. An adviser who asks to be paid is not a mentor. He or she is a consultant, and the relationship is a commercial one. A mentoring relationship has to be based strictly on mutual respect. A mentor should be motivated by nothing more than the desire to help. The person receiving the mentoring should be there to learn.

Second, a mentor's role is not to advise you but rather to give you a different way of thinking. I often have to remind my mentees that I'm not telling them what they should do. I'm simply offering another perspective, based on my experience. It's critical that they consider what I say but then make their own decisions. Otherwise, if things don't work out, they will blame my adviceand miss out on the opportunity to learn from the best teacher of all: experience. In that sense, a mentor is not so much an adviser as a sounding board.

As for finding a mentor, there is no particular formula. My mentees have come from various sourcesrequests from friends, meetings, conferences, responses to this column, community organizations, calls out of the blue. I suggested Delcie look wherever he was likely to encounter entrepreneurs with more experience than he has. That could be a chamber of commerce meeting, a business conference, or an industry gathering. Service Corps of Retired Executives, or SCORE, is worth a try as well. I thought he might also look through recent Inc. 5000 lists for companies in his region.

Beyond that, I urged him to start slowly and let the relationship evolve. "You can simply ask for occasional counseling along the lines of: 'Would you mind if I came by now and then to bounce some ideas off you?'" I said. I warned him that he might face rejection, but overall he'd find that most people who have built successful companies will be happy to help.

Norm Brodsky on Knowing When to End a Partnership

Norm Brodsky — Tue, 03 Jul 2012 00:00:00 -0400

Unfortunately it can take some time before you realize that a business partnership isn't built to last, and hopefully you have documents in place to mitigate conflict.

Dear Norm,

Two years ago, I became a minority investor in a business that does background checks. I work on the sales end. I could be a lot more successful if my partner would give me a hand. But he refuses to pick up the phone or send an e-mail to thank customers for using the service and to find out who referred them. He won't even give me the information so that I can follow up. As a result, I don't get the high-quality leads I could use to bring in more sales. The problem, I think, is that he's content with the income he's earning now and doesn't care about growing. Can you suggest a way to light a fire under him, or is it just time to move on?

—NAME WITHHELD

No partnership can survive for long if the goals of the partners aren't aligned. Unfortunately, partners seldom become aware of their nonalignment until they've been working together for a while. That's why partnerships always need a written document detailing the terms of the arrangement. This is especially important if you're going to be the junior partner. Both parties need to recognize that partners often wind up disagreeing. The document must spell out how such disagreements will be dealt with, as well as how the partnership can be dissolved. There's very little a minority shareholder in a private company can do about conflicts without such a formal agreement.

Our letter writer, unfortunately, did not have one. From the tone of his query, I suspected he already knew his partnership was finished. He told me he was earning about $10,000 annually on the deal, while working 60 to 80 hours per month. I said, "So you're making $10 to $13 an hour, and you're not going to earn more unless this guy starts helping you get better leads, which isn't going to happen. A leopard doesn't change its spots. Could you get your investment back if you left?" He said he could. "So why would you stay?"

He explained that he'd gone back to school, and his earnings from the business were helping to cover his expenses. "OK, fine," I said. "Maybe you keep doing this until you graduate while making a plan about what you'll do when you leave." In any case, he has learned an important lesson. I doubt he'll make the same mistake again.

The Single Most Important Rule of Business

Norm Brodsky — Tue, 29 May 2012 11:30:21 -0400

Entrepreneurs are great at meeting challenges with optimism--but sometimes that's not what the business needs.

There's a funny thing about entrepreneurs: They're often way too optimistic about sales and way too pessimistic about prices.

I've witnessed this phenomenon many times over the years, most recently in two women with whom I've been working. A few months ago, Carey Balogh and Julia Dawson opened a play space for kids near my home in Brooklyn, New York. It's called Frolic, and it offers classes, birthday parties, a boutique, a coffee lounge, and a play area, all with a rock 'n' roll theme. It's a great concept, and it will be very successful, I'm sure. But first, Carey and Julia need to learn that business decisions must be guided by numbers, not emotions.

When Carey and Julia come to see me, they're always bubbling with excitement. They can't wait to tell me how well things are going—how many members have signed up, what new offerings they're considering, the great publicity they're getting. Then we go through the numbers and discover that they're not yet breaking even. They're losing money every week. "You have to make some changes," I told them recently. "If you don't, you'll run through your capital and be left with two choices."

"What are the choices?" they asked.

I told them they could stop taking salaries. "We can't do that," they said. "What's the other choice?"

"You can close the doors."

"But we're successful," they protested.

"Not yet," I said. "And if you don't follow the rules of business, you'll go broke."

We began looking at how they might increase revenue profitably. And that's when we ran into their pessimism about pricing. Carey and Julia set prices the way most other novice entrepreneurs do it—by looking at what competitors charge and then charging a little bit less. But Frolic isn't like the other play spaces. None of them have a facility with an atmosphere as exhilarating or a space as creatively designed. Carey and Julia can certainly charge more. Will they lose some customers as a result? Very likely, though not the ones they should be targeting. The customers they want are the parents who care about—and are willing to pay for—Frolic's amenities. Charging an appropriate price, I told the women, will put them on the path to profitability.

Fortunately, Carey and Julia are eager learners and quick studies. I have no doubt they'll master the rules of business soon enough. Anyone can do it, and all entrepreneurs should.

How to Find the Perfect Acquisition Target

Norm Brodsky — Tue, 29 May 2012 10:36:36 -0400

You know your business better than anyone else. So skip the broker--and do the homework yourself.

Dear Norm,

Our company is looking to expand through acquisition. I am uncomfortable using a business broker and wonder what other options are available to us. We have very specific requirements as to the size and geographic service area of the company we would be interested in purchasing. We have sent out introductory letters to several companies and followed up with phone calls but have not had any positive responses. Any suggestions would be appreciated.

—David Cornelius, CEO, CSSI, Lewisburg, Pennsylvania

Making an acquisition is a lot like landing a new customer. You first have to locate the good prospects, and then you have to be persistent in pursuing a deal. When I spoke to Dave Cornelius, it quickly became clear that he had done a good job of identifying about a dozen prospects for acquisition. He also has everything he needs to identify as many more as he wishes to, including comprehensive lists of other companies that, like his, are resellers of certain types of software and hardware. In addition, he and his people attend reseller conferences and seminars and know service representatives who are in constant contact with resellers. So he could easily put out the word of his interest in doing an acquisition. "With all those resources, why would you even consider going to a broker?" I asked.

I did think, however, that he had given up too easily on the prospects he'd targeted. "You wouldn't expect to close a sale after a letter and a follow-up call, would you?" I said. "You need to send another letter and then stop by each prospect for a visit. I'm not talking about pressuring anybody. Take people to lunch. Build relationships. Treat them exactly as you'd treat a prospective customer. Sooner or later, everybody sells. When the time comes, most owners have no idea whom to call. You want to make sure they call you. You also want to generate buzz. They can help you do that by talking to other owners. Plus, there may be opportunities for collaboration or joint ventures. Keep an open mind, and stay in touch."

How to Stay Alive When Business Shrinks

Norm Brodsky — Tue, 29 May 2012 08:30:00 -0400

You've used everything you had to keep going, but it may not be enough. Norm Brodsky weighs in on what to do next.

Dear Norm,

I am the second-generation owner of a wholesale shade-tree nursery that has been in business for 30 years. When we were profitable, we were making more than $500,000 a year. But over the past three years, we have lost more than $300,000 a year, largely because of the downturn in the housing market. I've used my equity and retirement savings to keep going. As a result, 80 percent of my net worth is gone. Meanwhile, the bank is threatening to close my line of credit. My CPA thinks we will be OK if we can just hang in for two more years, but if I don't secure new financing, we won't make it. I love this work, but I am struggling to see the future. Do I keep going? The economy is improving, but maybe not fast enough. What would you suggest?

—Name withheld

Accountants are historians. They are good at telling you what a company has done in the past, but it's always dangerous to take a CPA's business advice going forward. I was concerned that this writer—let's call him Jim—might make a disastrous mistake based on his CPA's assurance that he just had to hang on for two years. The CPA, it seems to me, is assuming that the real estate market, and thus the market for trees, will bounce back by mid-2014. That is highly unlikely, in my view, and certainly not something to count on.

After talking to Jim, it wasn't hard to diagnose his problem: His cash flow from operations is not enough to cover both his operating costs and the annual payments on his debt. Although the company's sales have improved since bottoming out in 2008, they are still—at $790,000—barely 40 percent of what they were at the height of the housing boom and $400,000 below his breakeven point. Could sales increase enough in the next two years for the business to become profitable? Who knows? There are no large, untapped sources of revenue Jim can go after, and so his fate depends entirely on what happens in the housing market. Meanwhile, he can't cut operating costs any more than he has. He would thus have to borrow more money to stay afloat while hoping for a miracle rebound in the market. Without one, he could be even worse off in two years than he is today.

I offered Jim an alternative scenario. "What if this change in your business is permanent?" I said. "What if you will never get back to the level of sales you had in the past? Maybe you should figure out how to stabilize the business at its current level." For example, his nursery occupies about 400 acres. He has more land and more trees than he will need even if the housing market recovers completely. I suggested that he run a sale on trees to reduce his inventory and consider selling half his land. He could then use the proceeds of both sales—land and trees—to pay off his debt. His operating costs would be lower after downsizing, and his breakeven point would drop accordingly. "If your goal is to stay in business because you love it," I said, "you'll be better off cutting back now than floundering for two or three more years, hoping sales will improve. That will do more than eat at your equity. It will eat at your heart." Jim thanked me and promised to let me know what happens.

How to Handle Employee Sabotage

Norm Brodsky — Tue, 01 May 2012 00:00:00 -0400

Not all employees resign gracefully. Some try to sabotage your company on their way out. Here's how veteran entrepreneur Norm Brodsky deals with it.

Dear Norm,

I have a problem with some former employees who've started a business that directly competes with mine. Not that I mind healthy competition. In fact, I welcome it. But I do object strongly to the way these people conducted themselves as they were leaving.

It began with a manager who, I later discovered, was starting a business and working on it while he was still my employee. He then began to recruit away other employees in key positions in sales, IT, and accounting. It turned out they were doing projects for the new business at the same time I was paying them-that is, using my company's resources to give their business a jump-start.

Of course, when I found out, I fired them. But the new people I've hired are having a challenging time putting out fires set by the ones I got rid of. Before they left, the latter sabotaged my business by delaying deliveries and otherwise not taking care of clients. Their motive, I believe, was to get my clients so frustrated they could be easily stolen away. How should I deal with this situation?

-Richard Gan, President, Computer Network Systems, Pasig City, The Philippines

As a business owner, I know of no worse feeling than the sense of betrayal you feel on learning that someone you trusted has stolen from your company. It's the same when people use your resources to start a competing business. They're thieves, too. Most of us have two gut reactions to such revelations: We think about getting revenge, and we feel we can no longer trust any of the people we work with. Those feelings are natural-but the worst thing you can do is to let them govern your actions.

My advice to Richard Gan was to focus on stabilizing the business, holding on to as many customers as possible, and winning back those who have left. The best revenge he can have right now would be to succeed at all three. Granted, he probably has grounds to sue his old employees, but it would be a mistake, in my opinion, to pursue legal action. For one thing, it would be expensive. It would also distract him from his most urgent tasks: protecting and rebuilding his business. Moreover, a protracted court battle would keep the wound open. He'd be much better off putting his energy, time, and money into overcoming the damage the defectors have caused.

At the same time, Richard needs to learn a lesson from this episode. He bears some responsibility for letting himself and his company get into such a vulnerable position. It's his job to make sure that customers receive the level of service they've been promised and feel loyal to the company, not just to the employees they interact with on a regular basis. If those employees are their exclusive contact with the company, the company's hold on the customers will be tenuous at best. The owner needs to touch them at least once or twice a year and let them know the company is looking out for them. Had Richard done that, he would probably have figured out much sooner what his disloyal employees were up to, and he could have minimized the damage they caused. Granted, he can't change the past. But at least he can avoid repeating it.

Buying a Business? Expect the Unexpected

Norm Brodsky — Tue, 01 May 2012 00:00:00 -0400

If you're considering buying a business, consider veteran entrepreneur Norm Brodsky's advice first.

Dear Norm,

Last May, my husband and I purchased the assets of a failing catering company that we believed had a strong client base and a great deal of potential. We're still in business, but we're struggling. Although I believe labor cost is the main issue, I'm afraid that if we lay people off, we won't have enough staff to meet demand. To make matters worse, our overhead is higher than we expected, because the figures we were given by the previous owner were not accurate. (For example, he showed us an electricity bill of $200 a month, but we're paying $900.) What should I do?

-Emma Cerulli, Em & Seb | Boutique Catering, Montreal

Buying a business is tricky. Every company has secrets you discover only after you own it for a while. Emma Cerulli and her husband, Sebastien Barthe, obviously didn't do enough research before buying their company. The business's actual cost of electricity should have been one of the easiest pieces of information to obtain. They simply had to examine a couple of years of utility bills, rather than looking at just one. They also should have determined before the purchase why the business was failing under the previous owner. Instead, they are still figuring it out almost a year later.

Nevertheless, I think Sebastien and Emma are going to be all right. By the time I spoke to them, they had taken steps to get their food and labor costs in line with industry averages. They had also raised prices-which hadn't changed in nine years-and received no complaints from customers. I see no reason they can't begin earning a profit of eight percent to 10 percent of sales in fairly short order. I advised them to focus on that first. Once they are consistently making money, they can turn their attention to finding new business. I suggested they begin by looking for ways to offer additional services to their current customers.

Finally, I urged them to talk to their lawyer about withholding future payments to the previous owner. Knowingly providing false information to a buyer is fraud. It would be a waste of time and money to pursue litigation, but-if what Sebastien and Emma say is true-they shouldn't pay the seller another dime.

How to Deal with Late Payments

Norm Brodsky — Tue, 01 May 2012 00:00:00 -0400

When times are tough, customers take longer to pay their bills. You can count on it. Veteran entrepreneur Norm Brodsky says that's the wrong time to start thinking about how to deal with it.

Most of the entrepreneurs I know have been having a tough time getting customers to pay on time, which always happens in a bad economy. Some people get so nervous that they plead with, or even start harassing, their customers. That seldom works and invariably creates resentment on both sides. After all, customers are also under pressure. And they have extra reason to be annoyed if you've never discussed payment terms with them.

And chances are, you haven't. Many entrepreneurs, as well as most salespeople, make the mistake of thinking they've closed a sale when a prospective customer agrees to buy whatever it is they're selling. But no sale is final until the payment arrives—after all, a $10,000 receivable won't help with this week's payroll. Many people panic and do things like offering discounts to customers, who conclude they were previously being overcharged, or doing other things that damage their client relationships.

The long-term solution is to work out payment terms with customers at the start of the relationship. That way, you and your customers will be clear from the get-go. And that mutual understanding will completely change the nature of the discussions you're able to have later on, when the economy sours and receivables lengthen. If customers don't pay on time, you're in a much stronger position to press them or to work out new payment schedules. Should you give a customer additional time, you'll be doing him or her a favor, which will strengthen the relationship instead of undermining it.

And what if you haven't negotiated payment terms? At this point, there may not be much you can do to speed up customers' payments. So you may have to slow yours down accordingly. I'd turn to my vendors and explain the situation-your business is financially sound, but cash flow is a little tight, because everybody's paying late-and tell them that, until business improves, you'll be taking 15 more days than usual to pay your bills. If you've been a good customer, most vendors will acquiesce. As for those that yell and scream, I'd say, "Well, I understand your position. Maybe I'll just have to look for a new vendor. I don't want to, but I have to do what's best for my business." It's a rare vendor that won't relent.

The Commodity-Pricing Trap

Norm Brodsky — Tue, 03 Apr 2012 00:00:00 -0400

Norm Brodsky advises on how to avoid the race to the bottom.

Dear Norm,

My partner and I have a business that rents photo booths for weddings, parties, and corporate events. My partner has developed software that uses blue-screen technology to create thousands of different backgrounds for the photos, which adds a whole new level of fun. As far as I can tell, we are the only company that offers this. I recently started another business that sells photo booths equipped with the software to people who want to start their own rental services. A large competitor of ours has sold a lot of standard photo booths by saying that a booth-rental business is one of the easiest and least expensive to start up. I know I can beat the company on price, but should I use its marketing approach or highlight the software that differentiates us?

—Jolina Li, Owner, EntrePIXneur, Hartford, Connecticut

When you're starting a business, it's easy to fall into the trap of trying to compete against larger companies on price. That's what Jolina Li is considering—despite having a technology that could provide a strong competitive edge. That would be a big, and potentially fatal, mistake. When you build a business around having the lowest price, you soon find that there's always someone else around who can offer an even lower one. As a result, you are under constant pressure to keep reducing yours. At best, you end up with an unsustainable commodity business that's no fun to run and an obstacle to achieving the goal of becoming economically self-sufficient.

In Jolina's case, moreover, competing on price is completely unnecessary. Her software gives her something extra to offer, which allows her to charge at least as much as her competitors and maybe even more. Either way, she can use the software to carve out a niche for her business at the high end of the market. Granted, some people will be looking for the least expensive photo booth they can find, but they're not the customers she should be going after. Rather, I suggested that she target those who are focused on creating successful businesses and therefore want to be sure to get a booth that comes with the best technology available—namely, hers.

But I cautioned Jolina that a niche lasts only until competitors catch on and start copying you. That's what Jolina's rivals will do if they discover she's siphoning off sales. Yes, she could try to obtain a patent on the software, but the process is lengthy and costly, and there's no guarantee she'd get one.

So, instead, I urged Jolina to start looking immediately for other ways to differentiate her service—preferably through methods that give her a longer-lasting edge. Her partner, for example, could use his tech skills to spruce up the business's website or boost its search-engine rankings. Or perhaps Jolina could establish exclusive relationships with websites that cater to party planners or to people looking for business opportunities. Or she might consider partnering with an organization that helps first-time entrepreneurs get their businesses up and running. That way, she could offer potential customers not just the tools to start a photo-booth-rental business but also the expertise to make it successful. There are many possibilities. I'm sure Jolina will come up with more on her own. The one thing she should not do is build her business around having the lowest price.

Do You Need a Business Broker?

Norm Brodsky — Tue, 03 Apr 2012 00:00:00 -0400

When buying a business, what's the going rate for hiring a broker, and who is responsible for paying it?

Dear Norm,

I'm planning to purchase a business but have concerns about the broker who found it for me. He wants to charge me a 25 percent commission. Because my offer was unsolicited, he says, the seller (a friend of his) isn't willing to pay the full commission but will split it with me if I allow the broker to represent both of us. Aren't commissions usually paid by the seller? Isn't that one awfully high?
—Name Withheld

I'm no fan of business brokers. I'm not saying they're all crooks. Some really do provide excellent service, especially those who focus on particular industries. But most business brokers are generalists. In other words, they claim to be so knowledgeable about business in general that they are able to do a good job advising any buyer or seller on any type of transaction in any industry. That's baloney on the face of it. In my experience, moreover, enough of these generalists are ethically challenged, so to speak, that it's a good idea to be very cautious when dealing with them.

As for this particular broker, I told the writer—we'll call her Peggy—that I believe that what he was doing was unconscionable. A broker's fee is simply one component of the overall price of a deal. By asking Peggy to pay the fee, the broker was saying, in effect, that the price he originally quoted was not accurate. The actual price is 25 percent more. That is to say, he lied. Although he may claim to be representing Peggy in the transaction, it's clear that he's acting strictly in his own interest—and not at all in hers.

Therein lies a lesson: Most brokers can be counted on to represent themselves. A broker's livelihood depends, after all, on 1. Making sure the deal gets done and 2. Doing it for as much money as possible. Of course, that's also what sellers want. I advised Peggy to hire a good lawyer to represent her and to have as little to do with this broker as possible. She later told me that she had decided not to go forward with the acquisition. Under the circumstances, I told her, that sounded like a smart move.

When Is It Time to Throw in the Towel?

Norm Brodsky — Tue, 03 Apr 2012 00:00:00 -0400

Giving up isn't something that comes easy to entrepreneurs, but sometimes, giving up might just be the best move.

Giving up isn't something that comes easily to entrepreneurs. We're stubborn and incurably optimistic. But sometimes, throwing in the towel might be precisely the right move.

I recently spent a long time talking to my friend Tom, who has been struggling for several years with his business. On the positive side, he puts out products that customers love, and his company has had a great impact on its community. Unfortunately, he's running a for-profit business, not a charity. Three years ago, he expected the company to break even for the first time. Instead, he lost $250,000. The following year, he had the same expectation—and the same result. This past year, he projected a loss of $70,000 and lost more than $200,000.

Now, once again, he is projecting a breakeven year. I wish him nothing but the best, but I can't help asking whether he should continue. I faced a similar dilemma when my messenger company, Perfect Courier, went into Chapter 11 in 1988. Some very smart people, including my lawyer and my accountants, told me I should walk away, arguing that it was highly unlikely I'd ever make it out of Chapter 11. My response: "What a great challenge!"

For the next three years, all I did was try to survive Chapter 11. It was torture. Can you imagine going to meetings every day where people yell at you and make threats? Yet, as painful as the ordeal was, it taught me more about business than anything else I've ever been through. The lessons I learned—focus on profit, not sales; leave managing to managers; don't make hasty decisions; and so on—turned out to be great ones. By the time Perfect Courier emerged from Chapter 11 in 1991, I had already launched my next business, CitiStorage. Without those lessons, it would not have been nearly as successful as it was.

Was keeping Perfect Courier alive worth the price? Even in retrospect, I'm not sure—just as Tom can't be sure. It's tough to walk away when you've developed emotional ties to a business, as I had with Perfect Courier and as Tom has with his company. In the end, you just have to seek the best advice available, then use your best judgment. No two people will come to the same conclusion. Which leads me to wonder: How do you, the readers of Inc. and Street Smarts, feel about throwing in the towel? Have you ever given up on a business? In retrospect, was it the right decision? Or do you regret it? Let us know below, or send your comments to AskNorm@inc.com.

Norm Brodsky on the New Breed of Entrepreneur

Norm Brodsky — Tue, 28 Feb 2012 00:01:00 -0500

If nine out of 10 entrepreneurs are starting Web-based businesses. Is that trouble?

I spend a lot of time traveling and talking to aspiring entrepreneurs. And I'd estimate that nine out of 10 of them are starting Web-based businesses.

They're launching websites because they think it's easier, less expensive, and less risky than starting a traditional business—by which I mean one that requires direct physical contact with customers. What's more, most of these would-be entrepreneurs have full-time jobs and are pursuing their new ventures on the side. The start-up capital comes out of their savings. They figure that if they fail, they'll be out a few bucks, but their main source of income will be safe.

This is new. My audiences used to be filled with people who had raised, or were planning to raise, substantial sums to launch businesses to which they would be devoting every waking minute. They'd have to, because the price of failure was so steep. They were justifiably nervous about the risk. Many of them experienced what my late friend Wilson Harrell called "entrepreneurial terror." Nonetheless, these entrepreneurs went on to create the companies that have fueled the U.S. economy for 30 years.

I don't deny that it's easier, cheaper, and less risky to put up a website than it is to open a store, manufacture products, or provide a service to customers. At the same time, however, driving traffic to a website and turning visits into sales are other matters. Few of the would-be Web moguls I meet have figured out how to do these things. Most, I suspect, never will.

But there's another reason I am troubled by all these part-time, Web-based businesses. It's precisely because they are less difficult, less expensive, and less risky. When you've scrounged up every last cent and put it all on the line, success or failure becomes a matter of survival. Your instincts become sharper. You approach problems with a totally different mindset. If, in your part-time Web business, no customers show up for a week or two, you can take your time finding a solution. In a business you depend on for your livelihood, you have to come up with a solution immediately. I realize that there are many Web entrepreneurs who make that kind of total commitment to their companies. But my sense is that they are a minority. A decade ago, nearly every aspiring entrepreneur I met was 100 percent committed.

I hope I'm wrong. If I'm right, it could be very bad news for our economy.

Norm Brodsky on Weighing Prospective Clients

Norm Brodsky — Tue, 28 Feb 2012 00:01:00 -0500

How much time is too much time for a small-but-growing company to spend talking to and preparing estimates for prospective clients?

Dear Norm,

My husband and I run a small studio that does branding and packaging design. We seem to attract a lot of start-ups and small businesses—enough that we haven't had to pitch a client in more than three years. The problem is, I feel like we spend way too much time talking to and preparing estimates for prospects, only a small percentage of which turn into clients. This is wearing me down. I can't figure out why we aren't able to convert more prospects to clients. I earnestly want to grow my business, which is about five years old. We must be doing something right to get so much interest, but I feel we're doing something wrong, and I don't know what it is.

—Yael Miller, Co-Owner, Miller Creative, Lakewood, New jersey

As regular readers of this column know, I'm a numbers guy. I believe you need to look at the numbers to understand what's really going on in a business. Yael Miller thought she was spending too much time with prospective clients. So naturally, when I spoke to her and her husband, Reuben, one of my first questions concerned the rate at which they convert leads into customers. "It's a little less than 22 percent," Reuben said.

"Well, I have some news for you," I said. "That's a really, really high percentage."

"OK, that's good," Yael said. "But..."

"No, that's not good," I interrupted. "It's beyond good. It's great. In any business, turning one out of five prospects into clients is amazing."

"But it takes a lot of time," Yael said. "Maybe we're just too small to handle all the requests we get."

I asked them to take me step by step through what they do when contacted by a potential client. Almost all of their leads come through their website. Yael interviews each prospect for about half an hour. Reuben then prepares an estimate, which takes about an hour. After reviewing the estimate, about 1 in 5 calls back to accept it and moves on to the next step—the preparation of a full proposal, which serves as a contract. Reuben said he spends about 90 minutes on each of those.

"What about the four who don't call back?" I asked. Yael said she tries to contact them but rarely succeeds. That's another 15 or 20 minutes per prospect. "OK," I said, "so the two of you are spending an average of about an hour and 45 minutes on each prospect who does not become a customer. Is that right?" They agreed. I asked them how much they charged per hour. They said that they used an hourly rate of $150, which covers various costs, including their time. We figured out that they were probably paying themselves about $70 per hour. Multiplying that by 1.75 hours, we calculated that each lost prospect was costing them somewhere in the neighborhood of $122.50.

With that number, we could convert the time that the Millers were spending on lost prospects into a percentage of sales. It was simply a matter of multiplying the number of lost prospects per year by $122.50 and then dividing the result by the firm's annual revenue. The lost prospects, it turned out, were costing them about 6 percent of sales. "But don't think of that as wasted money," I said. "It's more like an investment. You're not paying for salespeople to get clients. You don't do any advertising. So 6 percent of sales isn't much. Without it, you wouldn't have any sales at all."

"So what's our problem?" Yael asked.

"It's how you're allocating your time," I said. "You shouldn't be spending a minute on chasing lost prospects. Your time's too valuable. A clerk can do that. And maybe you can have someone else qualify the leads you get from the website. But don't change the process, because it's working, and you don't want to screw it up."

They thanked me and promised to keep in touch.

Norm Brodsky on the Right Way to Reward Top Employees

Norm Brodsky — Tue, 28 Feb 2012 00:01:00 -0500

When you have a stand-out employee, is increasing pay and benefits enough?

Dear Norm,

I own food-tour companies in 11 cities. Business has been good, and we've been growing. I have one employee in particular who has played a key role in our success. She's been with us for a year and a half and has worked tirelessly. I'm planning to increase her pay and benefits. I'm also thinking of giving her some stock to show her how much we appreciate her contributions. Any thoughts?

—Jeff Swedarsky, CEO, Food Tour Corporation, Alexandria, Virginia

A year and a half may seem like a long time when you're just starting out in business, but I told Jeff Swedarsky he would someday look back on it as the blink of an eye. Many changes lie ahead for him, his company, and the employee in question, and he should bear that in mind as he thinks about what incentives to offer her. If he wants to give her stock, it probably should be phantom stock—which pays bonuses based on stock appreciation but is not an actual ownership stake. But I warned him that stock might not have the same significance for her as for him.

There might be something else she would value more—such as additional time off or cash bonuses. I suggested he spend some time with her away from the business and get a better sense of who she is and where she wants to go in life. He'll then be in a much better position to offer her an incentive that will really make a difference.

No Vacancy at the Hotel Brodsky

Norm Brodsky — Tue, 24 Jan 2012 00:01:00 -0500

By the time Norm's new hotel opens, it will have been booked for the next three years, and therein lies an important lesson for any entrepreneur.

The news from Tioga, North Dakota, is that Black Gold Suites—the new hotel I'm building there (see "Black Gold for You and Me," September 2011)—will open on March 1. But don't bother trying to get a reservation: By then, we'll have been booked up for the next three years. How that's happening is a story in itself and contains a couple of useful lessons about negotiating.

You may recall that, shortly after we worked out a deal with the city of Tioga in April 2011, we put up a billboard on our site announcing our intention to build a hotel, and we included a toll-free phone number. We hoped some of the big employers in the area would call to ask about reserving space. And call they did. In spades. We told them that the hotel would be completed in nine or 10 months. Several of them said they wanted to meet with us. We said we weren't ready to meet.

Understand, I was dying to meet with them, but I didn't think the time was right. I believe that in negotiating, you should never ask for something you're pretty sure you won't get. What I wanted from the employers were letters—or, better yet, contracts—indicating their intent to reserve a certain number of rooms for an extended period of time. I could then use those contracts to get a bigger loan from the bank. But I had reason to believe the employers wouldn't be willing to sign any letters or contracts until somewhat later.

A little background here: As I explained in the September column, the use of the new (and controversial) practice of hydraulic fracturing, or fracking, has led to an oil boom in northern North Dakota that has drawn thousands of workers to the area. The result is an acute shortage of lodging, which I proposed to help relieve by building an extended-stay hotel. I wanted the local bank to give me a loan, but I knew that no banker in his right mind would offer me a construction loan. After all, I was talking about building a 100-room hotel in a town of about 1,300 people. It was far too risky a proposition for the bank. So I didn't ask for any upfront money. Rather, I proposed that the bank give me a loan after Black Gold Suites was built, when the risk would be much lower. I'd finance the first hotel myself, to the tune of about $6 million. Then I would use the bank's money to finance the two other hotels we were planning to build on land we'd bought elsewhere in North Dakota.

That was a deal the bankers could make. They indicated they would be willing to let me have a loan amounting to 50 percent of what it had cost to build the Black Gold Suites in Tioga. It was a good offer, but I wanted more, and I figured I could get it if we had long-term commitments for all our rooms by the time we completed construction.

I had a sense, however, that we were unlikely to get any commitments from the big employers before we had a building to show them. First, there was the response I'd received when I'd asked the city auditor why the Hess oil company hadn't built lodging for the dozens of people it employed in the area. "We've had them in here," she'd said. "They told us, 'It's not the business we're in. We pay these people plenty of money. Somebody else will come along and do it.' " In other words, Hess didn't want to get involved in the construction of hotels.

What's more, I'd learned that someone else had already tried, and failed, to build a new hotel in the area. The would-be hotel builders who'd preceded us had gotten only as far as pouring the foundation. I had to assume that they'd attempted to raise capital before they'd abandoned the project. No doubt they had approached the big employers for commitments and been turned down. If I went to those same employers and didn't have a hotel to show them, they'd figure I was just like the previous group—an underfinanced builder who couldn't be counted on to finish the job. I wanted to avoid that association at all costs.

Now, I suppose you might wonder why I didn't just have preliminary meetings with the employers who'd called in and then set up a second round of meetings when the hotel construction was further along. That brings up another negotiating principle: Never assume you'll get two bites of the apple. In my experience, more than one bite is rare. What's more, I thought that having meetings before we were ready to do a deal would show weakness, and that would hurt our negotiating position later on. In the first meeting, people would ask us what we wanted. We'd have to inform them that we'd subsequently be asking them to reserve a bloc of rooms. They would thus come into the second meeting with the understanding that we needed them, which would have put us at a disadvantage.

On the other hand, if we waited until it was clear to everybody that the hotel was going up without outside financial support, people wouldn't know exactly what we wanted until we sat down together. That would enable us to negotiate from a position of strength. We'd be offering the employers an opportunity, not pleading for their help. We could say—truthfully—that we'd received numerous inquiries from companies interested in leasing our rooms and we were pretty certain that they would go fast. We would be able to tell the employers that, before we opened for business, we were giving select customers the chance to sign a lease guaranteeing them as many rooms as they thought they'd need.

And that's exactly how we played it. People who called for a meeting were told, "Yes, Mr. Brodsky is the person you need to speak with, but he is away for the next couple of months." That was also true: I was doing a lot of traveling. "He'll be happy to talk with you when he returns." Meanwhile, construction proceeded apace.

I'd decided to wait until the framework and the outside walls went up. If you've ever built a warehouse or some other structure, you know that, with the walls in place, it appears as though the majority of the work has been done, although you're probably just a quarter of the way there. You still have to do all the interior construction, the wiring, the plumbing, and so forth, but most people don't see that. What they see is a building that—from the outside—looks very similar to the finished product. They assume the rest of the work will be completed in short order.

Our construction crew raised the walls of Black Gold Suites in November, and we began having meetings with prospective clients shortly thereafter. We'll wind up with five or six firm commitments. Then I'll go back to the bankers with a deal that I think they'll be quite willing to make, since it will involve even less risk than they've been expecting.

And, oh, yes. You are all welcome at the grand opening next month. Just remember that you may have trouble finding a place to stay—and the temperature, with the wind chill, is likely to be about 20 below zero.

Norm Brodsky on Keeping Peace in the Family

Norm Brodsky — Thu, 08 Dec 2011 00:00:00 -0500

The best way to avoid bickering over family ownership of a company is to put everything in writing early on.

Dear Norm,

My sister had a great idea for a product and started a business. I joined her and put in long hours, without compensation, for two years. My sister promised me 10 percent of the business in return. However, nothing was ever put in writing.

She kept at it, and in 2009, orders for the product took off. Our brother stepped in, investing hundreds of thousands of dollars, and the company is finally turning a profit. The question is, How much of it do I actually own? My sister says I own only 10 percent of what the company was worth when I left. She says my rightful share today is "minuscule," given the large infusions of cash from my brother. What is the fair division at this juncture?

Name withheld

Ownership disputes can be ugly. If the disputants are members of the same family, the potential for ugliness is even greater. For that reason, I always advise people to formalize ownership understandings with family members early on, rather than counting on mutual goodwill to resolve problems that may arise.

That said, the family in question may still have enough mutual goodwill to strike an agreement that is acceptable to everyone. I told the writer (who asked to remain anonymous; I'll call her Karen) to imagine that the growth capital had come from an independent investor rather than her brother, and that the investor had received 40 percent of the stock in return. That would have left 60 percent for Karen and her sister. Assuming they were both willing to honor their original agreement, Karen's sister would have ended up with 54 percent (that is, 90 percent of 60 percent) of the stock, and Karen would have gotten 6 percent. The sister would thus have retained control of the business, while Karen and the brother would have been compensated for their contributions.

I urged Karen to sit down with her siblings as soon as possible and work out some such agreement. They should then turn it into a legal contract among the three of them. Aside from clarifying what they've settled on, they will need a formal ownership agreement in the future if Karen's sister eventually decides to seek outside funding. Mutual goodwill isn't something you can rely on when doing deals with professional investors.

Norm Brodsky on Wining Over the Employees of an Acquisition

Norm Brodsky — Thu, 08 Dec 2011 00:00:00 -0500

How can you retain a great company culture when forcing an ownership transition?

Dear Norm,

In 2002, my wife and I sold the automotive-repair business that we had owned for 15 years. We were fine for a while, but things have gotten very tough. I never thought that, at the age of 48, I would be unemployable. My wife has started a housecleaning business to make ends meet.

Meanwhile, a new opportunity has come up. We're thinking about buying a car-repair shop in Florida. It's very successful and well managed, with 19 employees and 11 repair bays. My wife and I have the experience to make this work, but I'm concerned about having a smooth transition. The company has a great culture. We don't plan to change a single thing. In fact, we want the current owners to stay on for a year while we learn the ropes. What else can we do to make sure the transition is as easy as possible?

Michael A. Dunn
Shamong, New Jersey

When you buy a company, culture is key. In my experience, more acquisitions fail because of cultural problems than for any other reason. So Michael Dunn is right to focus on that issue. I told him he was wrong, however, to think that he won't "change a single thing."

He will make changes. It's inevitable. No two people run a company in identical ways. So my first piece of advice to Michael was to make a point of not saying that nothing would change. To have a smooth transition, he needs to maintain credibility and establish trust. He will lose both if he starts out by making a promise he can't keep. If it were me, I would get all the employees together for a meeting in which I would praise the previous owners, support the approach they've taken, and talk about strengthening it. I would say, "If there are ways you think we can improve, I'd like to hear about them." Then I would put up a suggestion box and get into the habit of reading and responding to every idea. The point is to include employees in whatever changes are going to happen.

Second, I told Michael that, however long the current owners agree to stick around after the sale, their ongoing presence should be at his discretion. He has to be able to ask them to leave at any time. You don't really know someone until you've worked with the person for a long period of time. Michael has no idea how well they will all get along. For that matter, neither do the current owners. But given the responsibilities he'll be taking on when he buys the company, the choice has to be his.

Entrepreneurs as Perennial Optimists

Norm Brodsky — Thu, 08 Dec 2011 00:00:00 -0500

Even in tough times, entrepreneurs are incurable optimists. But too much optimism can blind you to the obstacles ahead.

Consider a recent survey of Inc. 5000 CEOs that appeared in the magazine's October issue. Eighty-five percent of respondents described their companies as "strong" or "very strong"; only 25 percent felt the same way about the economy as a whole. Even the worst economy in 80 years can't get a business owner down.

That said, if you happen to be an entrepreneur—especially a first-time entrepreneur—you would be wise to keep a leash on your optimism. I'm not saying you should stop being optimistic. Optimism is great. You wouldn't have a business without it. But unless it's balanced by realism, optimism can blind you to obstacles and lead you to take unwise risks. In the start-up phase, overoptimism usually takes the form of unrealistic sales projections, which lead to inaccurate cash-flow projections, which in turn lead to incorrect estimates of the start-up capital needed, which then lead to running out of cash. Overly optimistic sales projections can also cause trouble during the expansion phase of a business, but the greater danger there is that you won't take into account everything that could go wrong with your growth plans.

I speak from experience. Back in 1988, my overoptimism landed my messenger business in Chapter 11. The key mistake I made was to use the credit of my healthy business, Perfect Courier, to prop up a very sick business, Sky Courier, which I had recently acquired. It never crossed my mind that I might not be able to make Sky Courier successful. But it failed, bringing Perfect Courier down with it. The latter's demise happened only because I had tied the fate of the two businesses together. It took me three years to work my way out of Chapter 11, which gave me plenty of time to think about what I had done wrong and why, and how to avoid doing it again. Part of the problem, I realized, was overoptimism, which led me to make crucial decisions without thinking through the pros and cons.

So I came up with two rules. First, if you have a viable business, protect it. Don't do anything that would jeopardize it. Above all, walk away from any opportunity that could bring the main business down if things don't go as planned. Second, never make a major decision about your business without first taking a shower. That's right—a shower. Not only do I do my best thinking in the shower, but I never have time to take one during the day. So I'm actually telling myself to put off the decision at least until the next morning. In the beginning, I had a hard time following this rule, but it eventually became second nature. I can't say I haven't made any mistakes since adopting it, but I've at least managed to avoid making big ones. Plus, I'm cleaner than ever.

Norm Brodsky on Overcoming Your Fear of Competition

Norm Brodsky — Tue, 01 Nov 2011 00:00:00 -0400

Norm Brodsky says that buying a business to stifle competition is never a good move. Spend the time and money improving your own business.

Dear Norm,

In the fall of 2008, I bought a poorly run wholesale souvenir company whose products were popular with gift shops. I've since stabilized the business and am now looking at expanding. There is another company that I have not viewed as a competitor, although its products are equivalent in price and quality to mine. Unlike me, the owner has sold the products directly out of her small shop, as well as to a few large retail customers. Now she has put the business up for sale, at a much-inflated valuation. I have gotten in touch with the broker and am considering buying it as a defensive move. I fear that if it is bought by a company with distribution and sales reps in my region, I'll face stiff competition that will cut into my revenue and erode most of my profit. Even if I get the price down, I'll have to dip into my savings to do the deal. Do you think I am being overly pessimistic, or are my fears justified?

—Name withheld

You should never buy a business for the wrong reasons, and buying one to stifle competition is definitely a wrong reason. As I told the woman who sent me the query—I'll call her Rebecca—such a move doesn't really protect you from anything. After all, what is to stop someone else from coming along and starting a business with the same characteristics as the one you've bought defensively? You will have wasted your money and, more important, your time and energy, which would have been better spent working on your own business.

Besides, you should never fear competition. Competitors can't hurt you. You can only hurt yourself. If you offer better products and better service than anyone else, you will attract plenty of customers. I think you need competitors, and it doesn't bother me to have strong ones. They expand the market, and they keep me on my toes.

That said, you shouldn't ignore the potential sale of a competitor. I told Rebecca she should see this as an opportunity to increase her business. The broker had told her that the owner was selling because she was spending all of her time on another business she owned. If she's not paying attention to her customers, now is the ideal time for Rebecca to try winning them away.

Please send all questions and comments to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. You can follow them on Twitter at @normbrodsky and @boburlingham. Their book, Street Smarts, is available in paperback.

Norm Brodsky on Dealing With Picky Customers

Norm Brodsky — Tue, 01 Nov 2011 00:00:00 -0400

What should you do when customers insist on working only with you?

Dear Norm,

I started my photography business in early 2010 as a desperate shot at success. I had been bouncing from job to job, was in a custody battle for my daughter, and—at 32—faced the prospect of having to move in with my father. At first, it was hard to get clients, but I noticed an opportunity in real estate and architecture and decided to focus on those markets. By July, I had so much work that I had to hire an assistant. This year, I've added nine more people. Although I now have four other photographers on staff, we're turning clients away because we're so busy. I would like to expand the business, but I don't have time to work on it because many customers insist on having me do their shoot, even though my other photographers' work is as good as or better than mine. It is extremely frustrating. What should I do?

Richard Sharum
Owner | Shoot2Sell Architectural Photography
Richardson, Texas

In the early stages of most service businesses, people sell themselves to their customers. It happens no matter how hard you try to create the appearance of having a whole company behind you. You're still asking customers to have confidence in you. You can't show them how they'll be depending on an entire team, because you don't have one. But if the business takes off, you'll find you need a team. So you build one—and wind up in a situation like Richard Sharum's.

I suggested Richard make a distinction between his current and future clients. With the latter, he can start out fresh and sell the company. He can talk about his stable of photographers, each of whom he has vetted and trained. He can emphasize the company's internal quality controls and his role in overseeing them. New clients will thus come away understanding they are buying the services of a whole business.

The current clients present a different challenge, because they're used to thinking they're buying the services of one man. In effect, they have to be resold. Richard can make that task a bit easier by introducing two-tier pricing, whereby they'll have to pay 20 percent more if they insist on having him do the shoot. He can then try to dissuade them from paying the premium by emphasizing the skill of his staff photographers and educating customers about the other factors that affect quality. If he's persistent, he'll eventually change the current clients' perception of the value he adds, which will free him up to expand his business.

Norm Brodsky on Identifying Outstanding Salespeople

Norm Brodsky — Tue, 01 Nov 2011 00:00:00 -0400

Good salespeople focus on the particular feature the customer cares about.

A friend asked me recently, "What separates really good salespeople from merely average ones?"

I told him it comes down to one factor: knowledge of the customer. Prospective customers can sense very quickly whether you know enough about their needs to be able to offer what they want. Average salespeople use their limited time with prospects to sell them on everything a product or service can do, with predictably hit-or-miss results. Good salespeople focus on the particular feature that the customer cares most about. How do they find out what it is? By talking to people with specific knowledge of the industry.

I'll give you an example. At a reception recently, a salesperson for a software company approached me. He knew I was in the records-storage business. "Can I ask your advice?" he said. "I have a big appointment coming up with Iron Mountain that's taken me two years to arrange, and I need to understand what's going on there."

Iron Mountain is the giant of our industry, and it had a shakeup in April, with the former CEO, Richard Reese, stepping in to replace the man who had succeeded him just three years earlier. Reese put the digital branch of the company up for sale and made other changes that he said would increase Iron Mountain's return on invested capital. I knew what that meant. "They're selling into their unused capacity," I said.

"Explain that to me," he said.

"A brand-new warehouse costs me $5 million," I said. "So the first box I put on the shelf, I get 25 cents a month back from that $5 million investment." He laughed. "But if I can fit that box into one of my existing warehouses, almost all of that 25 cents goes straight to my bottom line. So if your software can help them track their unused capacity, that's what I'd highlight."

"OK," he said, "but I was thinking I could sell them on the savings. I can cut their costs by $200,000 a year."

"Well, Iron Mountain is a $3 billion corporation," I said. "I think saving $200,000 a year would be a secondary factor. I'd treat those savings as an added bonus." He thanked me and promised to let me know if he got the business.

Now, that is a good salesperson. If he had gone into the meeting trying to sell the cost savings, he would have gotten nowhere. Worse, he would have undermined his credibility, making it more difficult for him to sell the decision makers on the features they might really care about. By seeking out someone knowledgeable in the industry, he dramatically increased his chances of making the sale. Of course, there's no guarantee that he will be able to close this deal. What I can guarantee is that, over time, he will have a better track record than most of his peers.

Being Prepared When Things Go Wrong

Norm Brodsky — Tue, 27 Sep 2011 00:00:00 -0400

Whats the best policy for raising prices to offset the cost of materials?

Dear Norm,
Three years ago, I purchased a small manufacturing company that makes elastic yarn and elastic tag string. For the first couple of years, material prices were stable. By finding new vendors and purchasing in bulk, I was able to reduce material costs significantly. During the past year, however, material prices have skyrocketed. I reprice new orders as they come up, but I have a few large customers that place blanket purchase orders specifying monthly deliveries. I have followed the practice of the previous owner in limiting these blanket orders to 12 months. Unfortunately, when my largest customer's order came up six months ago, I didn't raise the price enough. What can I do now to offset the increase in my cost of materials for the next six months?

—Scott Silverman, president
Norbut Manufacturing, Fall River, Massachusetts

Most of us are familiar with Murphy's Law—anything that can go wrong, will—but we don't all take it into account when making plans. Experienced business people show their respect for it by asking themselves a ton of "what-if" questions to anticipate how their plans might go awry and to figure out what steps they can take to protect themselves. It's a habit young entrepreneurs would do well to learn.

By the time I spoke to Scott Silverman, he had contacted his large customer, which had agreed to a modest price increase. I complimented him for taking the initiative, explaining the situation, and asking the customer for a break. In dealing with these types of situations, the best policy is always to be open and honest with customers. But I also suggested he could avoid such problems by inserting a simple clause in his customer contracts that would allow him to increase the price if his material costs rose. Most customers won't object. If any do, he can negotiate the specific conditions and terms. He'll thus have one less thing to worry about—which will give him more time to focus on the things that have gone right.

Time to Change Your Strategy?

Norm Brodsky — Tue, 27 Sep 2011 00:00:00 -0400

If a competitor offers its product for free, should you do the same in hopes of increasing market share?

Dear Norm,
Our small business provides government agencies and consulting firms with specialized computer models that simulate flooding. Sales have been very slow this year, and one of my partners thinks we should make the software available as a free download to anybody who wants it. That's what our main competitor does, and a lot of people use its product even though it's not as good as ours. My partner's theory is that by getting our software into more hands, we would be able to sell more support subscriptions. My fear is that we would succeed only in losing a lot of revenue at the worst possible moment for our company. It would be one thing if price was the main reason we aren't selling more software. But, in fact, price plays a small role in a customer's buying decision. I'd love to hear your thoughts on what we should do.

—Reinaldo G.
(Company name withheld)

Changing a business model is a very big deal, and Reinaldo was smart to look for outside opinions before he committed to a course he could not easily reverse. Reinaldo told me that his company had 700 licensees using the software in question. The total market, he said, was 5,000 to 6,000 users. Reinaldo estimated that the company's revenue from current customers would drop by about two-thirds if it adopted the free-download model.

Suddenly, this became a no-brainer. "Listen to what you're telling me from a financial standpoint," I said. "You're saying that you'd have to triple your current number of users and go from a 14 percent to a 42 percent market share just to get your sales back to where they are today. And that's assuming a very high percentage of your new customers opt to pay for support. It's also assuming that a high percentage of your competitor's customers will decide to change their software. That's unrealistic. If they believe what they're using now is good enough, they'll probably stick with it."

To be sure, it sometimes makes sense to give your product away, and I might have reacted differently if Reinaldo had said the total market was a million users. But in such a small market, giving up two-thirds of the company's revenue makes no sense. Then again, there is a hybrid approach that might work. I suggested that Reinaldo think about offering new customers a six-month free trial. If they opt to keep the product after the trial period, they'll have to pay a licensing fee.

But I added a caveat. If the company adopts this approach, it should offer old customers something at the same time. They would be justifiably resentful if they felt they were being taken for granted. Customer loyalty needs to be rewarded. It's always a bad idea to treat new customers better than old ones.

Keeping Your Company Healthy

Norm Brodsky — Tue, 27 Sep 2011 00:00:00 -0400

A balance sheet is like a thermometer that provides a reading on the health of your business. Ignoring it could be fatal.

I've been thinking a lot about balance sheets recently, and not just because of our never-ending federal debt problem. I've been watching a friend of mine—let's call him Tony—struggle to save his company. The problem can be traced to a common failing: ignorance of the balance sheet. As dangerous as that ignorance is for a country, it can prove fatal to a business. And yet, most entrepreneurs I talk to have no idea what a balance sheet is, let alone how to read it.

Tony is fairly typical in that regard. He borrowed a lot of money to start two restaurants and had plans to expand to five, but the recession put his growth plans on hold. Determined to save his restaurants, he kept close track of their profitability or lack thereof. But he paid no attention to his balance sheet. He didn't know it was important. As a result, he was unaware of just how much trouble his company was really in.

Think of a balance sheet as a thermometer that provides a reading on the health of a business at the moment you take its temperature. You can quickly determine a business's solvency, for example, by checking its ratio of current assets (those assets expected to be converted to cash within the next year) to current liabilities (those that must be paid within a year). If the ratio is less than 1 to 1, the business is technically bankrupt. Granted, there's some wiggle room. You can postpone paying some bills or speed up collection of receivables and thereby keep the business afloat. But if the ratio falls below, say, 0.8, watch out. You're well down the path to insolvency—even if your company is profitable. Cash and profits are not the same. If you run out of cash, you're out of business.

In January, Tony saw that he would soon face a cash crunch. He sent me his restaurants' income statements, along with a rudimentary balance sheet. I realized immediately that something was missing. The restaurants appeared to be marginally profitable. Why did he have so much debt? What had happened to the cash? It turned out that the income statements did not include corporate overhead. The company as a whole was losing a ton of money. The loans Tony had taken out to finance growth had instead been used to cover the losses. He was now planning to borrow more money to get the company through the looming cash crunch. I told him to forget about it. "You can't borrow your way out of debt—ever," I said.

Since then, Tony has cut costs and persuaded investors to convert their debt to equity. He has at least a fighting chance of saving the business. I hope he succeeds. I also hope his story serves as an object lesson for others, reinforcing a point I've often made: Numbers run companies. It's your responsibility as an owner to know and to understand not only the income statement but also the balance sheet of your business. You ignore them at your peril.

Prospecting for Black Gold

Norm Brodsky — Tue, 23 Aug 2011 00:00:00 -0400

Norms next big move: opening a hotel in North Dakota

I thought I'd take a break from answering questions this month to tell you about my new business. It's called Black Gold Suites, and there's a story behind it. My wife and I spend part of every year in Telluride, Colorado, where we have a home and where I've gotten into residential construction. I've become friends with my builder, Steve Finger, who came to me earlier this year and said he wanted my advice about a business opportunity.

"Do you need money?" I asked. I knew that his industry had been hit fairly hard by the recession.

"No," he said. "I'd just like you to take a look at it and tell me what you think."

"OK," I said. "What is it?"

"It's a hotel," he said.

"Where?" I asked. He started to grin. "Is that funny?"

"It's in Tioga, North Dakota," he said. "About 40 miles from the Canadian border. It's a very small town. You wouldn't have heard of it."

"How small?" I asked.

"The population's about 1,300," he said. "Believe me, it's in the middle of nowhere. In the winter, the temperature gets down to minus 20." I looked at him. "And you want to build a hotel there?" I said. "Is this a joke?"

"No, no," he said. "In 1951, they discovered oil up there, but a lot of it was trapped in shale, which they couldn't get out of the ground economically. Now they can because of a new process called fracking. Hess is expanding its operations there."

I'd heard about fracking. It's used for extracting oil and gas from shale by pounding rocks so hard they crack and then injecting fluid into the cracks to force them further open, thereby releasing the oil and gas trapped inside. The process has generated controversy, and lawsuits, in Pennsylvania and New York because of concerns over water pollution. I asked Steve why that wouldn't be a problem in Tioga. "Nobody lives there. But that's also a problem. There's no place for the workers to sleep," he said.

"Where do they sleep now?" I asked.

He laughed. "It's a little hard to describe," he said. "You really have to see it."

My curiosity piqued, I decided to take a look. A few days later, we boarded Steve's plane, along with his partner, Ray Cody. There was not a soul in sight when we landed at the Tioga Municipal Airport. "How do you get into town?" I asked. "The president of the bank is coming for us," Ray said, "but there's a car that people can borrow if they need to." He pointed to a key hanging on a wall and a sign reminding drivers to unplug the engine heater before taking the car and asking them to refill the tank before returning it. Brooklyn, this wasn't.

Soon, the local bank president, David Grubb, showed up. He was also chairman of Tioga's economic development corporation. He drove us around to see the sights, including the convenience store, where the shelves looked almost bare to me. "What's with this?" I asked. Grubb explained that everything is gone by 10 in the morning on Fridays. It was about noon. "The workers get paid and come in and buy whatever is here. We're short of everything," he said.

That includes workers. In North Dakota, unemployment is 3.2 percent. In Tioga, it's less than 2 percent. Workers in the oil fields make about $100,000 a year, and people come from all over for jobs. "But we've got a problem with sleeping arrangements," Grubb said. "They either stay in their campers or in the man camp."

"The man camp?" I asked.

"Yeah," he said. "Do you want to see it?" We headed out of town and soon came to an encampment enclosed by barbed wire. Inside was a collection of 8- by 40-foot prefabricated metal boxes that resembled shipping containers. The boxes had been turned into living quarters for the men. And I do mean men. The rules are no drugs, no guns, and no women. It costs about $130 per night to stay in the camp, including dinner in a mess hall. (I was told that the food is good.) The camp has 250 bedrooms, as well as a gym, recreation facilities, two TV lounges, a laundry, a smoking room, and an Internet café. There's a long waiting list to get in. The men work for, say, 30 days, then have five or so days off, but they keep paying on their days off, so they won't lose their spot.

The rules are no drugs, no guns, and no women. It costs about $130 per night to stay in the camp.

Suddenly, the idea of building an extended-stay hotel in Tioga seemed appealing. I knew Steve and Ray had already purchased a 3-acre plot inside the town limits. It had access to water, electricity, and sewage systems. I still had questions, however. We headed back to town to continue our discussion at the bank. We were joined there by Jamie Eraas, the city auditor, the top administrative official in Tioga. I asked Eraas why Hess hadn't built lodging in Tioga. "We've had them in here," she said. "They told us, 'It's not the business we're in. We pay these people plenty of money. Somebody else will come along and do it.' "

"OK, we're interested," I said. "But we need to talk about financing." I looked at the bank president. "I'm sure you'd like to be our partner in this and help us out with a loan." I could see him stiffen. I knew he would say the deal was too risky. I quickly added, "And with no recourse." With recourse is the term for a personal guarantee. I don't do personal guarantees anymore. "Before you say no," I went on, "let me explain. I will put up all the construction money. I'd like you to agree to lend back to me a percentage of that without recourse after we get the certificate of occupancy. There must be a number."

He relaxed. "You're right," he said. "There is a number we could lend with no recourse, no personal signatures after the hotel is built. I'll get back to you." A week later, the bank offered a postconstruction loan for 50 percent of my investment. We're still negotiating.

There were a couple of other issues to deal with. "We're going to need a new access road," I said. "We can talk about that," the auditor said. "I notice you don't have any tall buildings in town," I said. "Do you have height restrictions? I'm going to need 50 feet." I figured the hotel would have four or five stories, at 10 feet per story. "That's higher than we allow," she said. "But we can go to the board and get it approved." "When?" I asked. "Let's see," she said. "We can do that on Tuesday." It was Friday afternoon. "Tuesday!" I said and asked, as a joke, "Why not Monday?" "Monday is a holiday," she said.

So now I'm in the hotel business. By the time you read this, we will have broken ground. We've had a billboard on the site since April, and we've been contacted by two major companies interested in reserving some of Black Gold's 100 rooms. Meanwhile, we've bought land for another hotel in Stanley, about 30 miles away, and we're negotiating to buy a third location.

When I was a boy, my father used to say: "There's a million dollars under your shoe. You just have to find it." I didn't understand what he meant, but I do now. I found quite a few millions under my shoe in the records-storage business. I bet there are many millions more waiting to be found around Tioga. The area is as ripe for entrepreneurs as Sacramento was in 1849. It needs restaurants, brewpubs, grocery stores, clothing stores, filling stations, and a lot of other things no one has thought of yet. After all, blue jeans didn't exist in 1853 when a 24-year-old German immigrant named Levi Strauss left New York for San Francisco to open a dry-goods store catering to gold miners. It won't surprise me to see several new businesses from North Dakota on the Inc. 500 in a few years. Who knows? Black Gold Suites may be one of them.

Please send all questions to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, is now available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.

Divvying Up the Business

Norm Brodsky — Tue, 05 Jul 2011 00:00:00 -0400

Making sure you have a good ownership agreement

Dear Norm,
I have a four-year-old custom crystal and glassware company whose sales are exploding. I started it when I was 22. I ran it by myself for almost a year before bringing in a friend and giving him 30 percent of the equity in return for his help in growing the business. Over the past three years, we've become closer than ever. Thanks to our mutual dedication and hard work, the business is flourishing, and he now feels like an equal partner. He thinks we should divide our profits 50-50. I find this difficult to accept, because I am the founder. I took the risk and maxed out all of my credit cards to start the business. I feel a little guilty about not wanting to share equally, but I also believe the 70-30 split is fair. Any advice would be greatly appreciated.

—Andre Janus, founder and CEO, Cristaux International, Chicago

It happens all the time: A new entrepreneur starts a business, brings in a friend, promises him some equity, and figures they'll work out the details later. No need to get lawyers involved. They'll handle it like friends. That's what Andre Janus and his partner did, and it wasn't a problem until they suddenly found themselves with a lot of money in the bank. Now what?

I told Andre that, to begin with, he was confusing ownership with compensation. Unless there is a written agreement that states otherwise, the majority owner can do whatever he wants with the company's cash. His partner's 30 percent stake does not entitle him to 30 percent of the profits—or any other share, for that matter. It is strictly Andre's decision.

And though the two of them needed to talk through their differences and reach an understanding, I discouraged Andre from making his friend an equal partner. I don't believe you should ever give anyone more than 49 percent of the stock in your business unless it's absolutely necessary—say, to raise capital you need to grow. The majority owner controls the business. If partners each own 50 percent of the stock, the company has two heads, which seldom works well in my experience and often leads to disaster.

Mainly, however, I said that Andre and his partner should retain an experienced lawyer to help them draw up a contract that spells out their respective rights and obligations beyond the ownership percentages. I'm all for relationships based on mutual trust, but circumstances change—often in completely unexpected ways. Andre and his partner are young and single. They have no idea what lies ahead. They can barely imagine what might happen to alter their relationship in the future, what complications could arise because of developments in the business or in their lives, or even what they will feel like doing five or 10 years from now. They need a formal agreement that explains, among other things, how funds will be distributed, what happens if one partner can no longer perform his duties, and how the partnership can be dissolved. Then they should review the contract every year or two and decide what needs to be changed. They should do this not only to protect themselves but to protect the company. Theirs wouldn't be the first to go out of business because of a failure to have an ownership contract with adequate safeguards.

Next: How to Avoid the Price-War Trap

Learn to Take Responsibility

Norm Brodsky — Tue, 05 Jul 2011 00:00:00 -0400

Learning to take responsibility for your mistakes

Lately, several CEOs of troubled businesses have come to me for help, and they've reminded me of an important lesson: You've got to take responsibility for the messes you get your company into. Problems will keep resurfacing until you recognize how your actions helped create them in the first place. That may seem obvious, but most people have a hard time seeing the role they played. It's always easier to point the finger at other people or circumstances or bad luck or forces beyond your control than to admit that you're to blame. I speak from experience. I had a hard time understanding my responsibility for the biggest disaster of my career: the 1988 bankruptcy of my first company, CitiPostal. Sure, I admitted to a key mistake—making a bad acquisition—but that was a way of avoiding responsibility, not accepting it. The subtext was, "We all make mistakes. So don't blame me." What I didn't acknowledge, or recognize, were my own character traits that had put the company in a position where such a mistake, coupled with unforeseen events, could send it into Chapter 11.

Oddly enough, an Inc. article about the bankruptcy forced me to face reality ("Fatal Attraction," March 1989). This was before I wrote for the magazine. The writer of the article, Robert Mamis, quoted an investment banker who had once solicited my business and whom I asked for help when I got into trouble. The banker asked for my financials, and I sent him a package. "I took one look at it and thought, This is embarrassing," he told Mamis. "No company can exist with this capital structure. Here I had tried hard to get a piece of CitiPostal's business, and now when I see it up close, it's a basket case."

That stopped me cold. In effect, the banker was saying that the bankruptcy was foreseeable and avoidable. Could he be right? The more I thought about it, the clearer it became that my mistake was actually a symptom of something else—my habit of courting risk. I like going up to the edge of the cliff and looking down. That character trait, I realized, had cost thousands of people their jobs. I resolved then and there never to make another decision that would put employees' livelihoods in jeopardy. To keep myself from committing the same error in the future, I came up with a variety of mechanisms, such as making big decisions only after sleeping on them, surrounding myself with detail-oriented people, and making sure I heard what they had to say before taking action. I also developed new habits, including insisting on finding out the root cause of problems and asking myself what role, if any, I had played in creating them. It took time, and it wasn't easy, but those changes allowed me to build a great business I eventually sold for $110 million. Without them, I certainly wouldn't be writing columns for Inc.

Previous: How to Avoid the Price-War Trap

How to Avoid the Price War

Norm Brodsky — Tue, 05 Jul 2011 00:00:00 -0400

Dealing with low-priced competitors

Dear Norm,
My husband and I started a business that makes and installs customized sheds. Our plan was to offer better service and higher quality than our competitors. When we noticed we were losing jobs because of our higher prices, we decided to reduce them. Since then, we've attracted customers who seem to care only about how cheaply they can get the work done. How can we decide whether the additional business is worth it?

—Sarah Rabenberg, co-owner, Central California Sheds, Modesto, California

I never like the idea of reducing prices because of competitive pressure from lower-quality producers. Not only will you lose margin in the short term, but you will have a hard time getting prices back where they belong. Nevertheless, I recognize that in some circumstances, you may feel you have no choice but to reduce prices. When that happens, you should consider alternatives, such as offering a different—and less expensive—product or service in addition to the higher-priced one.

Sarah Rabenberg and her husband had fallen into the trap of offering the same, high-quality product at a lower price. In effect, they'd gone into competition with themselves. But the mistake could be rectified, thanks to the discovery they'd made: The market for low-end sheds was different from the market for high-end ones. There's nothing wrong with offering two different products at two different prices for two different markets, as long as the products really are different. Maybe Sarah and her husband would use less-expensive materials in the lower-end product. Maybe they'd offer some extras on the higher-end product. Either way, they can still promise the same great service. Then customers can choose what they're willing to pay for. Sarah said she liked the idea and would think about it.

Previous: Divvying Up the Business | Next: Growing Up as CEO

6 Lessons on Starting Up From Norm Brodsky

Inc. staff — Mon, 20 Jun 2011 00:00:00 -0400

"Street Smarts" columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and built six businesses. Here, he shares his advice for businesses just starting out.

Though Norm Brodsky is often sharing his thoughts and opinions with the many entrepreneurs who come to him looking for direction, he makes sure they understand that the decision is theirs and theirs alone. "Otherwise," says Brodsky, "they won't take responsibility if they fail. They will simply blame 'bad advice' and lose the opportunity to learn from failure, which is always the best teacher." So the next time you're faced with a difficult decision, begin by asking yourself what it is that you want to be doing for the next 10 years. Be aware of the potential downside of each decision and, more important, the time, money, and energy each will require. Never lose focus of your goal. (For more, read "Building Your Business," May 2011.)

Novice business owners often find themselves spending their cash on building their inventory, which is a mistake, says Brodsky. However, the real problem isn't in the cash flow but the business model that requires you to have inventory in the first place. When you find yourself in this situation, Brodsky suggests selling off any excess inventory and using the cash to pay down debts. (Search "sell excess inventory" online, and you'll find a slew of services catering to that need.) Then, consider an on-demand business model. Sure, you might not be able to fill every order, but running out of a product from time to time isn't necessarily a bad thing. (For more, read "Are Your Credit Card Bills Out of Control?," April 2011.)

"One of the most common mistakes you can make in business is to assume that potential customers think the way you do," says Brodsky. Consider Justin Esgar, who created an iPad app that allows you to sign PDFs on your iPad in hopes of helping to reduce the amount of paper in the world. He had been pitching his product as a way to go green, says Brodsky, but for most people, the real benefit has to do with the time and money it can save. "Not that Justin shouldn't continue to tout the green virtues of his product, but he'd probably sell more copies if he focused instead on the time-saving features that almost any professional with an iPad would gladly pay $3.99 for." (For more, read "How to Keep Your Message Clear," April 2011.)

Generating publicity is key to getting the word out about your new business, but it oftentimes isn't enough to reach your target market. A mention in your local paper might not result in the surge of traffic you'd expect, probably because the article isn't targeted at a specific market, says Brodsky. Instead, he suggests, "make a list of the 10 categories of people most likely to want [your] services, along with ideas of how to reach each category." For example, if you're trying to target people planning to move, you could talk to moving associations about getting on their websites. "But building a business takes time," advises Brodsky. So don't be discouraged if your idea doesn't go viral overnight. (For more, read "Reaching Your Target Market," March 2011.)

How to Take On a Bully

Norm Brodsky — Tue, 31 May 2011 00:00:00 -0400

Dealing with a large competitor that intimidates your customers

Dear Norm,
Trade shows are notorious for the ridiculously high prices exhibitors are forced to pay for basic services. My business partner and I saw an opportunity to provide Internet access at trade shows for a fraction of what the in-house providers charge. Although they assert an exclusive right to provide the service, such claims are in blatant violation of FCC rules intended to foster competition and protect consumers. The major player in the industry is attempting to intimidate us, our customers, and our partners. We have filed a complaint with the FCC and are preparing a white paper to inform exhibitors of their right to buy Internet service from anyone they please. What is the best way to deal with this bully?

Seth Burstein
Co-founder, Trade Show Internet
San Francisco, CA

Anyone who has ever exhibited at a major trade show knows exactly what Seth Burstein is referring to. The rules are ridiculous and the fees outrageous, but if you don't go along with them, you'll face warnings and threats, and your exhibit could even be shut down. So, can you force the powers that be to change their ways without becoming a martyr?

In Seth's case, unfortunately, I think the answer is no. It would cost him hundreds of thousands of dollars to fight the issue in court. Even if he won, he'd succeed only in opening up the market for a slew of competitors. I also thought he was wasting his time doing a white paper. Exhibitors are being forced to overpay for services by thousands of dollars. As much as they may resent the high price of authorized Internet access, it's chicken feed compared with all the other costs. They aren't going to risk being thrown out of the trade show by insisting on buying access from Seth's company.

That said, Seth and his partner aren't about to quit, nor should they. But there are other ways to fight the battle. For example, exhibitors generally can't be required to rent the service from the authorized vendor if they own an Internet access kit that allows them to connect to a remote wireless service provider. Up to now, Seth's company has been renting kits to customers. Maybe he could figure out a way to transfer ownership to them for the duration of the show. Or maybe the company could focus its marketing efforts on smaller trade shows at hotels, where it is likely to encounter less resistance than it does at the giant shows. The point is that Seth and his partner need to stay focused on their real goal, which is to build a viable business, not to change the way trade shows are managed. They can do that later—after they've made their fortunes—if they still want to.

How to Adapt Your Business Model for Hard Times

Norm Brodsky — Tue, 31 May 2011 00:00:00 -0400

Norm Brodsky suggests getting a second opinion on big decisions.

Dear Norm, In 2004, I opened a dealership providing installation and service of high-end, custom-made garage doors. From the beginning, I had problems with the quality and lead times of suppliers. So, in 2006, I went into the garage-door manufacturing business. It was a huge success—until the housing market collapsed. These days, it's a struggle to keep the manufacturing operation going. Although I saved some money when times were good, those savings will run out early next year. I could stop manufacturing, but then I'll lose the highest-quality products on the market, and our installation business will suffer. I've been thinking about selling to dealerships outside our area, but I worry about the cost and the time involved. I don't know whether I'd be throwing good money after bad or saving my company from a slow, painful death. What do you think?

Gary Zacchia
CEO, Architectural Door Corporation
Fairfield, Connecticut

Changing a formerly successful business model is always tough. You naturally worry that you'll wind up with nothing. Yet you also worry you'll get into even more trouble—and maybe miss out on a growth opportunity—if you don't make the change. That's a good time to seek a fresh perspective on the situation, as Gary Zacchia was doing. From his e-mail, I could see that he was a smart businessperson. I was particularly impressed that he'd saved money during the good times, knowing they wouldn't last forever. Most people weren't so wise. But before offering my opinion on what he should do, I needed a little more information.

We talked, and Gary told me that his company installed almost all (85 percent) of the garage doors that it manufactured. He sold the rest to other installers. The installation work, however, accounted for only a quarter of his sales, and his gross profit on it was a mere 25 percent. Moreover, virtually all of his sales were to customers within a 20-mile radius, because it wasn't economical to provide installation and service beyond that area.

So the company obviously had growth opportunities, including the one he'd mentioned in his note—selling to dealers and installers outside his 20-mile radius. He might also think about outsourcing installation and putting all of his time and energy into the higher-margin manufacturing operation. Finally, I suggested he look for new products to make and new markets to enter—say, by selling to business as well as residential customers. His future clearly lay in manufacturing and selling more garage doors, rather than installing more of them.

But, of course, he already knew that. He just needed a reality check. We all do from time to time. I was happy to provide it.

How to Prepare Your Business for Inflation

Norm Brodsky — Tue, 31 May 2011 00:00:00 -0400

Norm Brodsky warns that a period of high inflation is coming and offers tips on what you need to do now.

To me, it's obvious that we're heading into a period of high inflation. If you aren't old enough to remember doing business in the 1970s—under Ford and Carter—it's hard to appreciate how dramatically the economic environment changes when inflation rises above, say, 6 or 7 percent a year. And that's where we're going. When? I can't say. But I have no doubt it will happen sooner rather than later, for two main reasons. First, inflationary pressures are building, and the government will be able to contain them for only so long. Second, I doubt government officials will really want to contain them, given that inflation lets us pay down debt with cheaper dollars. We are already seeing rising food and commodity prices. Eventually, I suspect, there will be a spike in the consumer price index, at which point the public's entire mentality will change.

So you can gain an edge by changing your behavior now. For example, this is the time to acquire hard assets, which will retain their value as the purchasing power of the dollar declines. And though I would never advise loading up on debt unnecessarily, if you have a good use for it and can get a fixed rate, don't be scared of taking it on: You'll wind up paying it off with cheaper dollars. You might also try extending your contracts and leases with suppliers an extra 10 years or so and locking in current prices. As for real estate, it's better to own than to rent, but if you do rent, you might want to see about getting an extension on your lease. Today, your landlord will probably think, It's a fair price, and I have a good tenant who pays me on time, when a lot of places are empty. Two or three years from now, you may find yourself negotiating in an inflationary environment with a landlord who's thinking, I can't commit to this rent. I have no idea what my costs will be next year or the year after.

Finally, I would try very hard to raise prices, even if it's just 1 or 2 percent a year. That way, when inflation spikes, you won't have to hit your customers with a big increase all at once. If your competitors are forced to do that, you'll have an opportunity to increase your market share at their expense.

Street Smarts | Inc.com

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