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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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

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.

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

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.

"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.)

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.

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.

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.

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.

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.

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.

Norm Brodsky talks about deciding which opportunities a small business should pursue.

Dear Norm,

I own a small roofing company that I started in 2003. Over the past few years, I've spent a lot of time and money creating a Web-based program for simplifying day-to-day administrative issues. I believe my program could be a huge benefit to other small contractors. I'm not sure, however, whether I should pursue the opportunity myself, sell my software to someone else, or forget about commercializing it and just use it in my own business. What's your advice?

Matt Behmer
Owner, Traditional Roofing
Flagstaff, Arizona

I tell all the people who come to me for advice that I will gladly share my thoughts and opinions, but they have to make their own decisions about what to do. Otherwise, they won't take responsibility if they fail. They will simply blame "bad advice." As a result, they will lose the opportunity to learn from failure, which is always the best teacher.

With Matt Behmer, I began by asking what he wanted to be doing for the next 10 or 15 years. He said he loved roofing. His goal was to become one of the biggest roofers in the southwestern United States. In that case, I said, he should forget about selling his software to other people. It gave him a competitive edge. He should keep it for himself and use it to help him achieve his goal.

Matt clearly found that advice hard to swallow. He saw the software as a great business opportunity. "I love my roofing business, but at the same time, I like being able to afford the finer things in life, too," he said. "I think I would kick myself for the rest of my life if I didn't at least try to do something with this product."

I told him, OK, he could pursue the opportunity if he wanted to, and he might make a lot of money with it, but he should be aware of the potential downside as well. If he made the software commercially available, his competitors might well buy it, and he would lose whatever advantage it gave him. More important, it would take time, money, and energy to build a separate business around the software. That would inevitably cause him to lose focus on his roofing business, which therefore wouldn't grow as fast as it would if he gave it his full attention. In the long run, he might make more money by using the software to build a great roofing company, which was what he wanted anyway.

But I emphasized that this was just my opinion. The decision had to be his. He said he would think about it and get back to me.

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.

Dear Norm,

I have a company that works with people who have credit problems. We offer a free initial consultation and then suggest ways that our clients can improve their creditworthiness. You'd think that—given the poor economy coupled with a credit crunch—a lot of people would want, and need, our services. Yet business has been slow. Almost all of our customers have come as referrals from mortgage brokers or Realtors. Unless the pipeline is constantly fed, we have too many weeks of inactivity. Part of the problem, I think, is that people with financial problems are ashamed to let that be known. I know they're out there. How can we make them aware that we are here and that anything they tell us is strictly confidential?

Eilene Kondysar
CEO, Innovative Financial Solutions
Williamsburg, Virginia

I have two rules of selling that I often recommend to people. First, if you've found a good way to make sales, focus on getting as many as you can with that approach before spending time and money on untested methods. Second, always try to turn negatives into positives.

I thought both of those rules would be helpful to Eilene Kondysar and her partner, Harold Vazquez. About 70 percent of the time, she said, she could persuade the real estate professionals she met with to start sending her potential clients, and about 95 percent of the prospects would sign up after the free consulting session that she and Harold offered. With such a success rate, it seemed obvious how to increase their customer base: Get more referrals. I could think of two ways to do that: First, go to real estate professionals outside their immediate area. Second, try doing similar referral deals with accountants, lawyers, bankers, and other professionals who would be likely to know or meet people with credit problems.

Eilene liked that idea, but felt she still had a challenge overcoming the "shame factor," as she called it. I suggested she could turn that negative into a positive by addressing the problem head on. For example, she could produce a brochure saying something like, Ashamed about credit problems? You don't have to be. It could happen to anybody. We can help you get rid of them, and we can do it in strict confidence. She could put a similar message on her website and in ads in local publications. Eilene loved that idea and said she planned to implement it immediately. I asked her to let me know how it worked.

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.

Norm Brodsky gives tips on how to determine if you are the right person to take your company to the next level.

Sooner or later, every growing company reaches a point at which the entrepreneur behind it should start wondering whether he or she is the right person to be CEO. The answer has a lot to do with the company's stage of development. The person who's right for the start-up phase may not be right when the business reaches the management stage. Veteran entrepreneur Norm Brodsky found out the hard way that he was a terrible manager.

Brodsky suggests there's no tried-and-true formula for evaluating a prospective CEO. Ultimately, of course, the proof is in the pudding: How does the company perform? By the time you see the results, however it may be too late. That said, here are the five criteria Brodsky uses in evaluating a person's ability to handle the responsibilities of a CEO.

First, a CEO has to be a leader, not simply a pied piper. Entrepreneurs are pied pipers. We play seductive melodies, conjure up wonderful images, and entice people into following us. Leadership is different. It calls for keeping a watchful eye on the business and making sure everyone understands what must get done. You need to create a sense of urgency about that.

Second, a CEO should have the ability to see around corners—that is, to recognize well in advance what has to be done for the good of the business—so that the company is always leading the industry rather than trying to catch up.

Third, a CEO needs a passion for problem solving. You have to be able to figure out quickly which problems require your attention and which don't, and then focus relentlessly on getting the big ones solved. It helps to be sort of a person who feels acutely unhappy until a problem is fixed.

Fourth, a CEO has to be able to put the company ahead of his or her ego gratification. Entrepreneurs enjoy the spotlight. That's fine when the company is establishing itself in the marketplace, but it can become a problem later on. You need to be willing to do what's best for the company at any given moment, which may include staying out of the spotlight.

Finally, a CEO must be financially literate in a way that goes beyond accounting. As CEO, you need to be able to use the numbers, not just to understand what has happened but to help you spot trends, identify problems, and head off trouble before it hits you.

Now, there are obviously many other traits not mentioned here, such as having a good strategic sense, working well with people, knowing how to delegate, and on and on, Brodsky says. 'I value all those qualities, but the CEO has a special role to play. He or she is responsible for the success of the company as a whole. For that reason, I believe the five criteria I've mentioned are the ones to focus on. Do you agree. Lew me know.'

How to optimize your marketing message by better understanding the customer

Dear Norm,
My software company released its first iPad app in July 2010. It's called SignMyPad, and it allows you to sign PDFs on your iPad. That means no more printing, signing, scanning, or faxing. I was hoping businesses would use it to become greener, but it seems most businesses don't care as much about that as I do. I've contacted blogs to tell them about SignMyPad, but I've yet to receive a response. How can I get my product in the public eye without breaking the bank?

Justin T. Esgar
CEO, Autriv Software Development
New York City

One of the most common mistakes you can make in business is to assume that potential customers think the way you do. In talking to Justin Esgar, I could see he was doing just that. He has had a business as an authorized Apple consultant for three years. He also cares a lot about the environment and created SignMyPad in hopes of helping to reduce the amount of paper in the world. By the time we spoke, he'd sold about 7,500 copies at $3.99 each. While that's hardly Angry Birds territory, SignMyPad does rank among the top 25 business apps for the iPad. One television network had featured it in a segment on the five best iPad apps to use with a stylus. Justin has also generated some favorable online reviews from real estate brokers, including one who said he couldn't live without SignMyPad.

I can easily understand why real estate brokers, among others, would love it, but I could also see why Justin's promotional messages might be falling on deaf ears. He had been pitching his product as a tool for going green, because it eliminates the need for paper when dealing with PDF documents that have to be signed and returned. I doubt that pitch is very effective outside the environmentalist community. For most people, I suspect, the main appeal of SignMyPad has to do with the time and money it can save—and, by the way, it's good for the environment. Not that Justin shouldn't continue to tout the green virtues of his product, but I told him he'd probably sell more copies if he treated those benefits as an add-on and focused instead on the time-saving features that almost any professional or businessperson with an iPad would gladly pay $3.99 for.

And he shouldn't limit himself to the real estate market. I suggested that law firms and accounting firms could be prime prospects for him. Stock brokerages and investment managers are also fertile territory. As part of managing my investments, I have to sign documents for my broker all the time, and it would be a lot easier if I didn't have to print and scan or fax them. Justin promised to try all these ideas—and to let us know how they worked.

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 available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.

Dear Norm,
Seven years ago, I started a T-shirt company as a hobby, but I became more serious about it when I saw how well people responded to my designs. Sales grew quickly. Figuring I could sell more T-shirts if I had them in stock, I began using my credit card to increase my inventory. Big mistake. The inventory did not move as fast as I expected. Now, the income from the T-shirts is barely enough to cover my credit card bill each month. I have ideas for new lines I'd like to release, but I don't have the money to pay for them. I feel stuck. What should I do?

Aaron Castellanos
Founder, Aphesis
Mesquite, Texas

Every start-up has the same goal: to become a viable business. By viable, I mean that the business can sustain itself on its internally generated cash flow. It does not have to rely on outside sources of capital to pay its bills.

Often, however, your first idea about how to reach viability doesn't work. When that happens, you need to change your model. Aaron Castellanos was at that stage, although he didn't know it. He thought his problem had to do with his decision to use his credit card to increase inventory. His real problem was his business model, which required him to have inventory to begin with.

The first step was to get rid of the old inventory that wasn't selling and use the cash to pay down his debts. I told him that, if he searched online under sell excess inventory, he would find dozens of services catering to people like him. Then he had to figure out a way to avoid winding up with the same problem in the future. That would mean printing only as many T-shirts as he could sell. I suggested he think about changing to a print-on-demand business model. For example, he could raise the $1,000 to $5,000 it would cost to buy his own printing machine and then print shirts as needed. Or he could do that in partnership with someone who already owns a printing machine and isn't using it all the time. It can be a way for that printing business to deal with its own excess capacity. Aaron said he would think about it. In the meantime, he'd focus on reducing his excess inventory and ordering fewer T-shirts in the future. He said our discussion made him realize that it wasn't bad to run out of a particular design now and then.

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 available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.

By now, it's pretty clear that we're in for a prolonged period of government cutbacks on the city, state, and federal levels. Should you be worried about the potential impact on your business? Let's just say you need to pay close attention. Change creates opportunities, and there's going to be a lot of change in the coming years, as governments everywhere are forced to reduce spending and cut back on services.

You may already be anticipating change if you do business with the government, but if you don't, you shouldn't make the mistake of thinking you won't be affected. All businesses will be affected. Some will feel the impact through customers that do government work. Every business will feel the ripple effects in the overall economic environment. Just recently, for example, the new governor of New York, where I live, announced his intention to cut about 10,000 jobs from the payroll. Whatever else that may mean, it will make available a lot of former state workers for employment in the private sector. It also means companies won't be competing for talent with state agencies that offer more security (supposedly) and plusher benefits. And it may mean that the state government will outsource more functions, which would create growth opportunities for private businesses.

If you have government contracts, my advice is to be proactive. You already know that the agencies you work with will be under pressure to reduce their spending. Don't wait for them to come to you. Go to them with ideas for saving money. My box-storage business showed our customers at city hospitals how to reduce their records-management costs by almost 10 percent. We wound up with more business as a result.

You should also be proactive with customers that do business with the government. It's likely that they're already thinking about how to adjust to the change. I would set up strategy meetings with each of them. Find out what they're thinking, how they plan to respond, what changes they feel they have to make in their businesses during the coming years. And tell them you want to be their partner. It's an opportunity for you to solidify your relationships with those customers and maybe pick up some new business in the process.

I don't mean to be Pollyanna-ish about the situation. You can't cut out millions of dollars in government spending without pain being felt in the economy. But usually economic shocks catch us by surprise. This is one of the few times we have advance warning of what's coming. That's a big advantage, and one that you shouldn't let go to waste.

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 available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.

Norm Brodsky offers advice on running an event for your customers without breaking the bank.

Dear Norm,

I've had an entertainment company in L.A. for more than 15 years. Like many others here, I had long wondered why all the good networking conferences were back East. A colleague and I finally decided to do something about it. In 2009, we held our first West Coast networking conference, with 93 speakers and 300 attendees. They loved it, but we lost about $8,000. Last year, we did it again, with 135 speakers and 400 attendees—and lost about $20,000. What killed us each time was the cost of the venue, especially the charges for food, beverage, and parking. What should we do?

Richard Propper
CEO, Solid Entertainment

Here's a good rule: No matter how much business experience you have, treat every new venture as if it's your first one and assume you have no idea what you're doing. If you approach it in that frame of mind, you'll get the help you need to avoid rookie mistakes.

That rule would have benefited Richard Propper and his partner when they went into the conference business. They had considered hiring a professional event planner but were scared off by the price tag. They decided to do it themselves and save the fee. The only problem was that they knew nothing about staging conferences. I've worked with event planners, and putting on a profitable conference is much harder than it appears. In particular, you need to know what you're doing when you negotiate with venues. Otherwise, you won't know what to ask for, how much to pay, and what other options you have.

I told Richard that he needed an event planner, although Hollywood might not be the best place to look for one. Someone who does parties for movie stars and studio executives probably isn't used to working within the budget constraints required to have a profitable business conference and won't be much help in determining the appropriate registration or sponsor fees. Fortunately, there are plenty of people who specialize in business conferences. "Hire people with experience, and watch closely what they do," I said. "Then, if you decide to do it yourselves the next time, at least you'll know what's involved."

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.

Norm Brodsky offers his advice on how to attract more of the right kind of customers.

Dear Norm,

A business partner and I run a virtual garage sale website called Tagsellit.com. I got the idea from my work as a Manhattan real estate agent. I had many clients looking either to reduce the clutter in their apartments or to furnish their apartments on a dime. Since launching the site in May 2008, we have signed up nearly 12,000 members, developed four iPhone apps, and published a guide for doing yard sales. But although we've received great publicity—including articles in The New York Times and The Wall Street Journal—and have done promotions through social media, our growth rate is disappointing. Short of launching a major ad campaign, how can we attract more people?

Jonathon Papsin
Founder, Tagsellit.com

I sometimes think the Internet has robbed us of the capacity for patience. If your Web-based concept doesn't go viral overnight, you think you must be doing something wrong. But building a business takes time.

In talking to Jonathon Papsin, I was struck by how much he and his partner had done right. For openers, they hadn't made the mistake of generating publicity before being prepared to handle the response. Their site was fully functional by the time the articles began appearing. But the publicity hadn't produced the expected surge in traffic, probably because the articles weren't targeted at specific markets. I suggested Jonathon make a list of the 10 categories of people most likely to want his services, along with ideas of how to reach each category. One type, for example, might be people planning to move—and thus looking for furniture movers. Jonathon could talk to moving and storage associations about getting on their websites. They might also let him contact their members to link with company sites as well.

It turned out that he and his partner had already begun doing something similar: They'd created space on their site in which consignment stores and estate-sale companies can promote their services. I suggested he arrange to get on the websites of those businesses as well. I doubt Tagsellit.com will ever go viral, but who cares? In business, slow and steady often wins the race.

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.

Each economic recovery is different. Norm Brodsky gives advice on planning for recovery.

A lot of people have been asking me how they can take advantage of the growth opportunities that will arise from the end of the recession. Having been in business through three economic recoveries, I can tell you that each one is different. I can also tell you that recoveries are more difficult than downturns. When the economy is sliding, after all, it's pretty clear what you should do: Cut expenses everywhere but in sales and marketing. When business picks up again, you have more choices, and if you make the wrong ones, you could find yourself in worse shape than ever.

I think this recovery is particularly tricky, because this recession has been so different from the previous three. It was brought on by ingrained behaviors around debt and spending that now have to change. We're still figuring out the implications of those changes, not to mention the effects of the actions that the government has taken in response to the financial crisis. So caution is the order of the day.

I admit that such caution goes against my entrepreneurial grain. Like most of you, I'm an optimist. In the past, I've always expected the economy to rebound quickly after a recession, and up to now it always has. Previously, I would gear up for the rebound by, among other things, expanding our work force in anticipation of substantial growth. I wouldn't do that this time around. There is simply too much uncertainty about what the future holds. I have to question, for example, whether we are even in a recovery.

I know that some parts of the economy are growing again. But I see few reliable indications of a general recovery. What I do know is that we started out with a huge amount of excess capacity in housing, manufacturing, and retail, and we haven't yet worked our way through it. Until we do, I expect the economy to grow slowly and unevenly.

So, on the hiring front, I'd advise holding off, even if it means continuing to work short-handed and paying overtime. Whatever money you would have spent on hiring people, I'd put into sales and marketing instead. That's the opposite of the advice I would have given in 1982, 1991, or 2002.

I'd also keep a close eye on your customers, most of whom, I suspect, are behaving as if we're still in a recession. I find that customers remain very focused on getting as much for their money as possible. To be sure, delivering value is always important, but in a strong recovery, customers become more focused on reliability and service. Price becomes secondary. I haven't seen that behavioral change yet. There is still a lot of pressure to reduce prices. You should resist it. Start by offering additional services instead of price cuts. If that doesn't work, I would hold sales or offer volume discounts for a limited time. But don't reduce your prices. In the future, it will be much harder to get your prices back to where they should be if customers have grown used to a new, lower price level.

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.

How to make customers realize they need your product

Dear Norm,
My new business puts on-site medical examination rooms in assisted-living communities. There is an urgent need for such rooms, because most communities don't have one. Doctors and dentists from outside have to treat their patients in the hair salon or the cafeteria, even in a shower stall sometimes. As a dentist myself, I am appalled by the unsanitary conditions that medical professionals have to deal with in these places. My problem is that the industry is in denial. I can get to the CEOs, but then they talk to the facility managers, who deny that a problem exists. How do I overcome this resistance, short of appearing on 60 Minutes or Oprah?

Stuart Boekeloo
Founder and CEO, Aleydis Centers
St. Joseph, Michigan

We all run into unexpected obstacles and problems when launching a business. It's part of the process. To me, it's what makes entrepreneurship challenging and fun. Often, however, we get so close to a problem that we can't see the solution sitting right in front of us. I think that's what's happened to Stuart. He actually isn't so far off in his joking reference to 60 Minutes and Oprah. He is acknowledging, in effect, that outside pressure is needed to generate demand for his product. So how can he create that pressure? For openers, he can bring the issue to the attention of the people who would care most about it—namely, the men and women who are putting their parents in these places. There are many ways to reach them. I suggested Stuart think about approaching organizations such as AARP, Consumers Union, or the Department of Veterans Affairs. Maybe they would run articles in their magazines and newsletters or develop a system for rating assisted-living facilities that would take into account whether they have separate on-site examination rooms.

Or, if Stuart has contacts in local government, he can try to get an ordinance passed mandating that any assisted-living facility have a medical treatment room. He could then say to the CEOs, "Look, the regulators are stepping in. Instead of waiting for them to force you, why don't you become a pioneer and lead the entire industry to do the right thing?"

The word pioneer got Stuart thinking. When I spoke to him, he mentioned that one of the largest assisted-living companies had agreed to put his examination rooms in two of its downtown Chicago facilities. "That's a start, but you have to get some press behind you," I said. "I'd begin with the Chicago media and go from there. It's perfect for them: an aging population, a growing need for assisted living, a problem that has to be solved, and a pioneer in solving it. The publicity will be great and may help you sell the customer on putting rooms in its other facilities."

"You're saying I should go outside," Stuart said.

"I'm saying that when something isn't working, you need to try something else," I said. "You've been going inside, and it hasn't worked—because there's no outside pressure on the facility owners to change. That's what's missing, and that's what you have to create."

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.

Advice for small business owners when winging it is not enough to build your company

Dear Norm,
Fifteen years ago, I answered an ad in the paper for a sales job in the foundation repair industry and got hired. The owner ran the business out of his garage and had two installers, plus me. With a lot of hard work, we became one of the top companies in our area. Well, about a year ago, I bought the company by somehow persuading a bank to loan me $2 million. My problem is that I have only a high school diploma and have come this far by working hard and winging it. I realize I need to stop winging it and build the company the right way. I'm just not sure what I should do to become the kind of leader it needs. What's your advice?

Bud Norton
Matthews Wall Anchor Service
Beaver Falls, Pennsylvania

Good entrepreneurs are constantly striving to improve themselves and expand their knowledge, but sometimes you have to stop and give yourself credit for what you've already done. What Bud has accomplished with so little formal schooling is nothing short of amazing. He's actually had a great education in business and one that he could never have gotten in a college classroom. To me, that is a big positive, not a problem, and I suggested that he start thinking—and talking—about it that way.

That said, I could tell after a few minutes of conversation that there is one area Bud hasn't yet mastered and needs to: the numbers. In that, he is no different from the vast majority of entrepreneurs, most of whom find accounting mysterious and daunting. But you really can't know what's happening in your company or make consistently good decisions without mastering the numbers.

There are many ways to acquire the knowledge Bud needs. I suggested four. The company used QuickBooks, he said. I told him he should get the employees who put in the numbers to show him how the program works. Second, I thought he should hire a strong accounting person willing to also serve as a kind of tutor. Third, I urged him to sign up for an introductory accounting course. Finally, I recommended that he read Financial Intelligence and Financial Intelligence for Entrepreneurs, both co-written by Karen Berman and Joe Knight, with my former Inc. colleague John Case. They provide the best, clearest guides to the numbers that I know of.

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.

Dear Norm,
My wife, Michele Baratta, and I have a jewelry business, which we converted six years ago into a direct-selling company. Previously, she had sold her jewelry wholesale to customers such as Nordstrom, Sundance Catalog, and Macy's, as well as to thousands of retailers. Although it was a big change,it has worked out great. Now I'm thinking we need a five-year plan with an exit strategy. Do you have any advice about when and where to get started?

Andrew Detwiler
CEO, Michele Baratta at Home
San Diego

I believe that, from Day One, you should build a business as if it's going to be sold—even if you never intend to sell it. When you look at it the way a potential buyer would, you notice things you might otherwise ignore, including improvements you can make and best practices you can adopt. So in response to Andrew's question about when to start preparing for an exit, my answer was, "Immediately."

As for where to start, the opportunities were all over the place, but Andrew had missed them—perhaps because he wasn't looking at the business through an investor's eyes. For example, he told me that the company sold Michele's jewelry through "consultants" who buy it and then hold house parties at which they resell it. When I asked how many consultants he had, he said "under 400"—out of 1,500 the company has recruited over the past five years.

So how does that turnover rate compare with the industry average? Can Andrew figure out ways to reduce it? What do other direct-selling companies do? Among the consultants, there are wide variations in productivity. What are the stars doing that the others can learn from? Are the company's prices right? What are the gross margins on its different types of jewelry? Maybe some lines aren't making enough money to justify their continuance.

The point is that building to sell will lead you to ask a lot of questions you should be asking anyway but don't because you're focused on the day-to-day, month-to-month challenges of running a company. Andrew and Michele have built a good business with great prospects, but there's more work to be done.

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.

Dear Norm,
I founded Chicago School Supply in 2006, and today the company has about $2 million a year in sales. I'm working hard and running a profitable business, but I'm barely making a living. Every April, we face tax bills that I have trouble paying because we're short on cash. Our accounting firm does our taxes but doesn't provide advice on how to maximize our profit and minimize our tax burden. I'd love to hire a CFO, but we can't afford one. How do I find a financial adviser who understands my needs?

-- Michael Ockrim, CEO, Chicago School Supply
Willowbrook, Illinois

Tax preparation is a chore most business people would rather leave to an outside accounting firm. They turn over their papers at the end of the year and hope for the best. When they wind up with a tax bill that is higher than they expected or can easily afford to pay, they blame the firm. But it's your responsibility and nobody else's to do tax planning for your business. You ignore that responsibility at your peril.

That's more or less what I told Michael Ockrim. He obviously needs tax planning, but it is important that he learn how to do it himself. I asked him how his company was organized. He said it was an LLC operating on cash-basis, rather than accrual, accounting. The question was, How could he defer some of the taxes he owed and give himself extra cash that he could use to build his business?

To begin with, he needs to start his planning process early enough to allow him to end the year with as little cash profit as possible. That's the idea if you have a young company using cash-basis accounting. I gave him a hypothetical -- and oversimplified -- example, just so he'd have a general idea of how it works. Let's suppose that you finished last year with $20,000 in cash. If you end this year with $50,000 (not including new capital you may have added during the year), you'll have a cash profit of $30,000 on which you'll owe taxes -- assuming, that is, you didn't buy depreciable equipment or software.

With planning, however, you can reduce your taxable income by, say, paying in advance bills for expenses you've incurred this year but would normally pay next year. Conversely, you can scale back your efforts to collect receivables for a month or so. You'll wind up with less cash at the end of December but more cash the following month.

In doing your planning, you need to be aware of some important nuances. Let's say, for example, that you bought $25,000 in software or equipment during the year, and it gets amortized over five years. That means only $5,000 of the cost can be deducted this year. The remaining $20,000 is added back to your taxable cash balance, as in the example above. You may be able to offset that amount, however, by borrowing money and using it to prepay expenses you've incurred but not yet paid for. Any new capital you put into the business isn't counted as taxable income.

To be sure, the taxes you defer will eventually have to be paid. But early on, you can usually keep your taxes low. I told Michael that he should look for someone knowledgeable about these matters to review his financial statements and guide him until he gets the hang of it. He should also meet with his outside accountants in September or October each year to get their suggestions about minimizing his tax burden for the year.

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.

Next Question

Norm Brodsky advises what to do when customers go bust.

Dear Norm,
So far this year, three of my customers have gone out of business without a formal bankruptcy proceeding. In each case, the bank—as the secured creditor—has taken all the assets and sold them off, leaving nothing for the trade creditors. If the cases had gone to bankruptcy court, we would have gotten at least a portion of what we were owed. If this is a trend, it's going to mean trouble for companies like mine. Is there anything I can do about it?

—Roger Cooper, chief financial officer
Spectronics, Westbury, New York

Unfortunately, there are times when somebody else's unfair, unreasonable, or even unethical business practices are simply a cost of doing business. I'm afraid that Roger Cooper's problem with disappearing debtors falls into that category. He told me they have cost him about $26,000 this year, of which $20,000 was owed by just one of the three. That money, he realized, was gone. He simply wanted to figure out how he might protect his company in the future.

So what are his options? Aside from checking Dun & Bradstreet reports, I could think of only two. One is to have his salespeople try to get financial statements from customers before making the sale. You can tell from a company's balance sheet how much debt it has and thus how much credit risk you're taking on its receivables. In fact, checking credit in advance should be a part of each salesperson's job, because a sale isn't a sale until you get paid. Roger's other option was to hire a specialized credit-checking firm that does in-depth analyses of customers' financial situations. Such a service, however, would probably cost Spectronics more money than the company would save by using it.

I asked Roger if he'd thought about selling Spectronics's services to the companies that had acquired the assets of his former customers. He said he had. I told him that was probably his best bet. If they were strong enough to do the acquisition, they could probably be counted on to pay their bills, and he might earn enough profit on their business to make up for what he'd lost.

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.

Next Question

Norm Brodsky explains how to find the right financial partner.

Dear Norm,
My wife owns two wedding boutiques—one in Charlotte, North Carolina, where we live, and the other in Raleigh. The Charlotte store did fairly well from the start, but the one in Raleigh did virtually no sales in its first six months. My wife felt frustrated, because she was too far away to know what was actually going on. I was able to develop a software program that would let her manage the store remotely. Sales in Raleigh more than quadrupled after we started using it there. When we installed it in Charlotte, annual sales there increased 29 percent. I figured other wedding stores might want to try it and signed up the first three, at $99 a month, in January 2010. Today, we're adding three to five customers a month. I know I need help, and I found a venture capitalist who seemed excited, but I haven't heard from him in three weeks. Now I'm wondering if I have the right VC. How do you know?

— Shannon Johnson, founder, Dresstracker.com
Charlotte, North Carolina

The solution to any problem begins with asking the right question. I suspected Shannon was asking the wrong question. He should have been asking himself whether he needed venture capital at all. "Do you understand the food chain of raising capital?" I asked. "The more speculative your concept, the more you give up. Venture capitalists generally invest in highly speculative concepts and demand a large share of the equity. You have customers, which means you have more options—and can get better terms—than someone who has only an idea."

I suggested he think first about how much money he needed and what he was going to do with it. "The answers will dictate whom to go to and what to ask for," I said. "Forget about whether you get the money from a bank or a VC or a group of investors."

It turned out Shannon already had an answer. He wanted someone to buy Dresstracker. "In that case, you're almost certainly going to the wrong guy," I said. "There are businesses that specialize in partnering with or acquiring companies like yours. You don't need a VC to find them." Shannon said that, in fact, he did have one customer who might be interested. "There you go," I said. "And if he won't do it, he may know someone who will. But whatever you do, don't let yourself be dependent on one guy who may or may not call you back."

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.

How to get the word out about your new business

Dear Norm,
At the beginning of this year, I decided to close down my business, CounterCrete, which specialized in custom concrete countertops, and got a job as a manager at a Target store. Because of various mistakes I'd made, I didn't have enough cash flow to carry on. In addition to countertops, CounterCrete also did interior stained concrete floors. Although I sold the countertop equipment, I held on to my work van and the tools to do the floors. When I began getting calls to do floor projects, I decided to start a new business, Nick Dancer Concrete, to supplement my income. The problem is, most people I knew from my previous business still think I do only countertops. I've put up a new Facebook page and sent out e-mails to former customers, but no one seems to get the message that I've changed businesses. What can I do to create a new brand focused on stained concrete floors?

-- Nick Dancer, founder, Nick Dancer Concrete
Fort Wayne, Indiana

We all have a tendency to focus too narrowly at times and to worry about things that aren't real problems. As a result, we waste mental energy that could be better spent in other ways. Nick Dancer was a case in point.

He started CounterCrete in October 2007 and made a go of it for two years despite the sluggish economy, which has been especially tough on people in the home furnishings business. He told me he'd also made the classic mistake of going for sales, rather than profits. By fall 2009, he said, he was taking on jobs just to pay his past-due bills. A few months later, he shut down his business and went to work for Target.

Now, he could have walked away from his creditors. Because CounterCrete was a limited liability company, he had no legal obligation to pay them. But he said his conscience would not let him go that route. So he sold his equipment and put in long hours at his job to raise the cash to cover his debts. That, in my experience, is very unusual and a sign of great character. It told me that he is a young man with a very bright future in business. Among other things, it gives him a story that can be of immediate help in his new business.

I told him he should not spend another second worrying about the people who know him as a countertop guy. There are, by his estimate, about 40 or 50 of them. The potential customers for his stained concrete floors number in the hundreds or thousands. They've never heard of him. His challenge is to let them know he exists, and he should focus on figuring out how to do that, rather than worrying about his brand perception among the small number of people who knew about CounterCrete.

One possibility is to try getting some local publicity. I mean, here is a young man whose first business was, like so many others, a victim of the recession and the housing crisis. Now he's back in business with the support of his former creditors, who appreciate how he treated them when the chips were down. That's a great story.

I also suggested he contact builders, architects, and interior decorators. Those are the types of professionals I go to for recommendations when I need work done in my home. I'm sure a lot of other people do as well. He can use experts in design and construction not only to find work but also to build his reputation as a specialist in interior stained concrete floors. The fact that he once had a business making concrete countertops will then be an asset, not an obstacle.

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.

Next Question

How to build your business up before you sell.

Dear Norm,
In November 2008, I started a business making baby slippers from used wool sweaters and used leather jackets. I sell them mostly on Etsy, where my business is thriving. I've received many more requests for wholesale accounts than I can fill. I've trained my second subcontractor and have added adult slippers to my line. My goal is to sell the business in about five years to a company that already uses recycled materials to make footwear. What must I do to make that happen? Should I trademark my name? Patent my design? Raise outside capital for expansion?

-- Josie Marsh, founder, Wooly Baby
Kennett Square, Pennsylvania

If you want to sell your company, you need a proven business model with strong cash flow and good growth prospects. Although Josie has been in business for two years and has attracted a following, she still has a way to go. Her sales aren't enough to interest a serious buyer. She also has capacity problems. And she's vulnerable to copycats. I advised her to trademark her company's name, which she can do inexpensively at an online trademark site. Securing a patent, however, is expensive and time-consuming, and she might not get one in the end. Instead, she should spend her time and capital on increasing sales. I suggested she consider marketing through services such as Google Affiliate Network and Commission Junction. She also needs to increase capacity. Finally, I cautioned her against seeking outside capital. She'd have to give up too much equity to get it. It's better for her to bootstrap for now.

Josie asked me how she would know when to approach prospective buyers. It wouldn't be for a few years, I said, and she had enough to do right now without worrying about it. I told her to check back with me in 12 months, and we'd reassess her situation then.

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.

Next Question

Dear Norm,
I'm the second-generation owner of a specialty gift shop and Native art gallery. We have been in business for more than 20 years. My challenge is to build the company while maintaining the high level of customer service that has become our hallmark. We have streamlined operations and standardized many store procedures. We cater mainly to a tourist market, but expanding to tourist centers in other cities would make hands-on management difficult at best. I am thinking about franchising, on the theory that a franchisee would be highly motivated to follow the plan and make it work. What do you think?

-- George Kiorpelidis, owner
Indianica, Montreal, Quebec

There's an old saying. that nothing happens until somebody sells something. The corollary is that you can't have a business without customers. So the first step in starting or expanding any business should always be to find out whether people want to buy what you plan to sell.

That was my advice for George. Before he spends money on a franchising consultant, he should investigate whether his idea has any appeal for potential franchisees. His plan was to target mom-and-pop stores in the tourist districts of other cities and persuade the owners to make the switch. I thought he was rushing the process. First, I suggested, he should find a couple of shops he would consider good candidates to carry his products, and then see whether the people are open to partnering with Indianica. Assuming they are, he can partner with them for a while. If that goes well, he can raise the possibility of franchising with them. No matter what, he'll learn a lot about the appeal of his concept.

In the meantime, I said, he should consider attending one of the many franchise conferences that are held around North America every year. He can go as an observer or as a potential franchise buyer to get a sense of how franchising operations work. He might also do some research on companies that could have franchised but chose to open their own stores instead. There's a ton of information out there, and most of it can be gathered at very little cost. George will be doing himself a big favor if he finds out all he can before he starts spending a lot of money.

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.

The importance of gaining access to decision makers.

Dear Norm,
My business partner, Andrew Brown, and I own a company that cleans movie screens. We started doing this type of work in high school and began our own business after college. We are now in our early 30s. It's a growing industry, thanks in part to cleaning crews that use leaf blowers to collect trash. They blow debris all over the place, causing rapid dust and food buildup on top of the nacho cheese, Gummi Bears, and spit wads that regularly get thrown at movie screens. And yet, despite the need for services like ours, I'm having trouble getting through to anyone above a field technician's position at the large chains. That's partly because the screen-cleaning business has an image problem. General managers are bombarded with sales pitches from local companies, each of which swears it has the best cleaning method around. There's a widespread perception that these businesses are selling snake oil and screen cleaning doesn't really need to be done. But as my customers can attest, our services increase light reflection and improve presentation at theaters, which can make a big difference to moviegoers. I could show other theater owners the value of what we do, but I haven't had much luck reaching people with authority to hire us. Any ideas?

--Michael Quaranto, 1570 Cinema Services, Chicago

Getting through to the right decision maker is a challenge for many people starting out in business. There are two fairly easy steps you should take before throwing up your hands in frustration, and I suggested both to Michael. The first is to make sure you've done all the necessary research. He told me, for example, that his company has worked with about 30 Imax theaters, and that there are more than 400 in existence. He has been approaching them one by one. While I admit that I had no idea this type of business even existed before receiving his e-mail, I have had some contact with the Imax corporation, and I asked Michael whether he'd considered trying to gain the exclusive rights to clean its screens. It turned out he knew little, if anything, about the company, its owners, or their relationship to the theaters. He obviously had some research to do. I invited him to get back in touch after he'd done it.

The second opportunity lies in not just attending industry trade shows and conferences but also actively supporting them. Michael said he'd been to a big Imax conference and made good contacts with theater owners. He planned to attend a Cineplex show as well. I told him he should pay for a booth. I've been involved in industry groups, and we call suppliers who attend but don't buy a booth at one of our conferences "freeloaders." They're taking advantage of the networking opportunities, but they're not helping to cover the cost of the event, and as a result their reputation suffers. Michael understood immediately and got right to work preparing for the next trade show.

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.

Next Question

And keep your costs low.

Dear Norm,
My husband and I have a business that rents ostrich-feather centerpieces, mainly for weddings. We get an overwhelming number of inquiries from California, Texas, and Florida. Because we are based in Cleveland, our travel fee to those states is a minimum of $1,000, which is more than most potential clients can afford. As a result, we lose the sales. How can we accommodate these requests? Right now, we are turning away a lot of good prospects.

--Angel Davis, Feathers By Angel, Cleveland

This is another business I'd never heard of. When I asked Angel how she got into it, she told me she had seen photos of ostrich-feather centerpieces at celebrity weddings and decided to use them for her own. It turned out they were available wholesale for about $150 each. She and her husband purchased 150 of them and built a business renting them out for other weddings and special events. The rental fee of $49 or $59 per centerpiece includes the lights illuminating each display as well as setup and removal. Travel expenses are extra, however, and can make the cost prohibitive to potential clients in distant states. I suggested that Angel consider modifying her business model. Instead of traveling to every event, she could team up with wedding professionals in other states who would, in effect, become her agents. She could offer them not only new leads but also an additional product to sell, on which she would receive a commission. As long as she protected herself by making sure her centerpieces were sufficiently differentiated from others, she could make as much as 20 percent per sale, which is revenue she isn't getting now, and it would require a small investment of time and money. I urged her to check out the many wedding planner and florist associations. Angel liked the idea and began her search for potential partners that same day. We'll see how it works out.

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.

Next Question

Dear Norm,
The real estate investment company my husband and I own has been doing business with Wells Fargo for more than 20 years without a problem, but we have a big one now. It goes back to three loans we took out in 2006 and 2007. We were looking for fixed-rate loans, using our real estate as collateral, as we had always done. The bank said we could get fixed rates only if we got these things called spurs and swaps. We asked about prepaying. At worst, they said in a presentation, we'd owe an amount "similar to, but generally less than, a prepayment penalty under a traditional fixed-rate loan." Well, as you know, interest rates have declined substantially. But when we went to pay off the old loans to take advantage of the better rates, we learned our prepayment penalties would be 6, 21, and 20 percent of the principal of the respective loans. Altogether, the penalties would come to almost $300,000. That seems outrageous, not to mention that it is the opposite of what we were told when we took out the loans. What can we do? --Debbi Waldenberg, D&D Investments, Kalispell, Montana

Debbi is not alone. Back in the mid-2000s, fixed-rate commercial loans became almost impossible to find. Many banks began insisting that if you wanted a steady, predictable rate, you had to do swaps or spurs, which were complicated financial instruments allowing you to get what resembled a fixed-rate loan but was actually a variable loan tied to another deal with a "swap provider," usually a third party. My company took out a loan during this period, and my banker insisted we do a swap. I didn't understand what it was, even after he tried to explain it to me -- and I'm not sure he did, either -- but it was our only option, and so we agreed.

At the time, a swap looked like a reasonable deal. In any case, it was the only way to get an interest rate that wouldn't vary over the term of the loan. The catch was that if interest rates plummeted, the only way you'd be able to get out early would be by paying a large penalty. Back then, however, almost no one expected interest rates to plummet. Then again, almost no one expected the financial crisis.

But the financial crisis came, and, in an attempt to revive the economy, the Fed decided to keep interest rates extremely low. I suspect thousands of companies are in Debbi's situation. What can she do? Not much. Her least expensive option is to hold on to the loans and make the monthly payments. (We paid off our loan, with substantial penalties, when we sold our business.) Of course, if she feels strongly that the bank has done her wrong and wants revenge, she can find a lawyer willing to launch a class action. The suit might even have a decent chance of succeeding if the bank did not fully apprise her and others of the risks of the loans before insisting they accept the terms of the deal. I wouldn't bother with a lawsuit because I don't think it's worth the time, the money, or the distraction, but it's not my decision. It's Debbi's.

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.

What to do when your new senior managers bring corporate ideas to your business.

Dear Norm,
I have a company of about 40 employees, who are dedicated and passionate about what they do. Most of them are motivated by the company's culture and mission. In the past year, I have hired three new senior people: a COO, a CFO, and a national sales manager. While it's great to have experienced professionals around, I worry about preserving our company culture. Some of their ideas seem like big-company bureaucratic solutions to simple problems. The latest is an annual employee evaluation. I just got wind of their new form. It's nine pages long and contains 20 questions on which the employee is rated from 1 (unacceptable) to 5 (superior). I am all for giving employees feedback on their performance, guidance for improvement, and rewards for a job well done. But this seems more demoralizing than beneficial. What do you think about these types of forms?

Jeff Patterson, president, Gaggle.Net
Bloomington, Illinois

I believe that an owner and CEO has no more important responsibility than setting the culture of his or her company. That can be quite a challenge, however, when you're 2,000 miles away, as Jeff is. When we spoke, he told me that he lives in Los Angeles, and his company's headquarters and operations are in Bloomington, Illinois. He spends one week out of six there. For most of the past 12 years, he has had a partner who has run the show in Bloomington, but the larger the company became, the unhappier the partner was. Jeff finally bought him out last October. The three new senior managers were hired in anticipation of his exit.

Now, I happen to agree with Jeff about employee evaluation forms like the one he described in his e-mail, but that's neither here nor there. What's crucial is that he and his on-the-scene managers be in total agreement about the culture. The managers are the ones who will be shaping it on a daily basis. If they're replacing Jeff's culture with something else, he will lose control of the business. Culture determines how a company functions -- who works there, how hard those people work, how they treat one another, how they relate to customers and suppliers, and on and on. A dramatic change in the culture would jeopardize everything Jeff has created.

I told him that, first, he has to decide whether the new senior managers will follow his direction. If the answer is no, he has to replace them. If the answer is yes, he has to sit down with them and work out the ground rules. Not that he should stifle them. He needs to let them know that he welcomes their ideas and will use some of them, but not those that undermine the current culture. "You should follow your gut feelings," I said. "They got you this far, and they'll get you to the next level. Yes, you'll make mistakes, but you'll be right more often than wrong."

Jeff seemed relieved. "I appreciate hearing that," he said. "It's so easy to second-guess yourself." He's right, of course, but entrepreneurs have to learn to trust their instincts.

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.

Next Question