Tag Archives: Terms

How Do You Plan for Expansion? Four Considerations

Situation: A growing company needs new space for operations and back office functions. They have grown steadily over the last two decades. Prospects for the future are positive. Options include expansion near their current location or to another, lower cost city. The CEO is also considering whether to sublease space or rent. How do you plan for expansion?

Advice from the CEOs:

  • Consider whether the company needs to expand in one step or whether it is possible to expand in stages. Also consider whether functions will benefit by being close to the primary base or whether, using Internet and telecommunications, the new location can be remote. This requires a careful analysis of not only the company’s functions, but also the strength of the management team and the willingness of key managers to relocate.
  • There are trade-offs between subleasing and working directly with the landlord.
    • The landlord will generally offer market rates, but the company gets to determine the terms and term of the lease.
    • Subleasing can save money, but the company is then at the mercy of the priorities of the tenant from whom they are subleasing. When things get busy, the company may disrupt the operations of the tenant. In another company’s case this resulted in a forced move with 30 days’ notice at the end of their sublease term.
    • Consider the cost of both moving and having to re-outfit the space to meet the company’s needs against the savings from subleasing.
  • Consider leasing a larger space, one which is convenient and enough for the company’s needs, and then subleasing excess space until it is required. This may cost more short term, but it puts the company in charge of their own destiny regarding space availability and utilization.
  • Another option is to buy a building and sublease the excess space until it’s required for company operations.

Diversify or Optimize Current Opportunities? Four Options

Situation: A company that manufactures and sells components to a large corporation has a dilemma. This customer is throwing more business their way, under favorable terms. At the same time, the company wants to diversify to reduce exposure to a single large client. The challenge is that alternate opportunities are not as profitable as those from this customer. As the CEO puts it, should they use limited resources to chase copper when gold is readily available? Do you diversify or optimize current opportunities?

Advice from the CEOs:

  • It is always dangerous to have all your eggs in one basket. Dedicate resources to develop alternative business opportunities, knowing that at first the new opportunities will not be as appealing as current opportunities with this large client.
    • Think back – has business from the large customer always been this profitable? In developing new business opportunities, one often must pay dues to develop opportunities for future profits.
    • Invest in business development to find new business opportunities outside of this large customer. Do this sooner rather than later. One never knows when a large customer will change strategic direction.
  • What are the company’s options and choices?
    • Stay the current course and accept the risks of this strategy or diversify.
    • Put some resources into studying options to diversify. If there is no gold out there, then maximize the cash from the current situation and invest it in something that will provide a satisfactory long-term return. If the large customer closes the door, then just shut down.
  • How could the company diversify? Geographically? Additional products to other customers? Put together a diversification plan and test it for feasibility.
  • Make sure that company’s and owner’s priorities are clear and not in conflict with each other.
    • What is the optimal size of the company?
    • How many customers are needed to support optimal company size and how much diversification is required for this?
    • What is the owner’s exit strategy and timeline?
    • If the objective is to stay small and exit in one or two years, why chase diversification? Think about what would be appealing to a potential acquirer. Perhaps it is just access to this large customer.

What Impact Will Rising Interest Rates Have on Business?

Situation: A CEO notes that the national debt has nearly doubled over the last 8 years and the Fed is talking about raising interest rates. It’s not clear what impact the debt, or rising interest rates will have. Has this impacted your business and how are you coping? What impact will rising interest rates have on business?

Advice from the CEOs:

  • Impact on business and customers.
    • The prospect of either rising interest rates or taxes increases uncertainty – customers are taking longer to make purchase, expansion and other decisions.
    • Companies are not spending the cash that they have out of concern over possible future expenses or the possibility of a downturn. Large companies have trillions of dollars of cash on hand. Some of this is held off-shore because of the tax consequences of repatriating the funds.
    • Lack of consumer demand holds back investment in production expansion.
    • Feeling of loss of control.
    • More concentration of wealth in fewer hands.
  • Other impacts
    • More people, old and young, are opting out of the business economy.
  • What are you doing to cope?
    • More involved in collections to keep this under control.
    • Delayed payments from big customers are part of the problem – conservative financial management.
    • Manage liquidity and cash – cash is king!
    • Adjust lifestyle and delay purchases – for example buy smaller cars.
    • Scrutinize contract terms – especially AR.
    • Scrutinize our business model. For example look at subscription models or Great Game of Business models.
    • Utilize those who are normally unemployable but trainable for repetitive task jobs. They work hard and produce good work.

How Do You Evaluate Distribution Alternatives? Four Thoughts

Situation: A software company is evaluating its distribution network. Historically they have worked with resellers who aggregate software services into packages for larger customers. Recently they were approached by a reputable distributor seeking a master distribution agreement with favorable payment terms. Is this an option that they should pursue? How do you evaluate distribution alternatives?

Advice from the CEOs:

  • There are at least three objectives to consider: market coverage, margin to the producer, and market risk.
  • For market coverage, evaluate the alternatives in terms of their ability and commitment not only to serve your current market but to expand into adjacent markets.
  • Regarding price and margin, there are two alternatives:
    • Decide what price you want, and don’t worry about the reseller or distributor’s final price to the customer, or
    • Establish a floor price for your product and ask for a percentage commission on sales.
    • Run models on each and decide which will provide the best return on sales.
  • Market risk is more complex. These are different approaches to the market.
    • In evaluating the reseller option, insist on terms in reseller agreements that the reseller disclose the terms of their sales.
    • Sharing of customer databases is another factor. Siemens, for example, considers their customer database as IP and only releases portions of their customer database selectively to resellers.
    • A master distribution agreement has different risks. It puts all of your eggs in one basket. If the distributor adjusts focus away from your software during the term of the agreement your sales and revenue will suffer.
  • Are there conditions where a master distribution agreement may make sense?
    • If the distributor is willing to sign a multi-year agreement with sales guarantees at favorable pricing this mitigates the risk.
    • The central issue is risk and guarantees. If you see the option as a low risk – high return proposition, it may be worth considering.

How Do You Respond to Delivery Delay Requests? Four Points

Situation: A company negotiated a contract with a customer giving them a significant price break in exchange for a large committed order with extended delivery. The customer has now come back and requests additional time for delivery and payment on the order. The company has already procured extra material to produce the large order. How do you respond to requests for delivery delays?

Advice from the CEOs:

  • Response will depend on the company’s history with customer. In the case of a long term customer who pays bills it is best to work with them. Explore solutions to meet them half-way.
    • Ask for a new commitment to take delivery by a date certain. Request consideration in return. For example, request partial payment up-front to help cover the cost of managing the delivery delay.
    • Keep the conversation going. Don’t get to point where you alienate a good customer.
  • If the customer is newer with less history but good potential for future growth, also respond flexibly but ask for additional consideration in good faith to cover your additional costs. As in the case above, request partial upfront payment to cover carrying costs – maybe a larger payment than for an established customer.
  • If the customer has been difficult in the past, or has been late with payments then the situation is different. There is no assurance that the customer isn’t just gaming the situation. Because the company has already committed resources to deliver the large order, demand an adjustment on price and terms in exchange for the delivery delay.
  • Whatever the history and situation, it is important to emphasize that you want to work with the customer.

What’s the Best Way to Renegotiate a Lease? Four Strategies

Situation: A company in a competitive real estate market has about 50% more space than they need at $2.80/sq. ft. per month – full service. The lease is up in 5 months with an option to renew for 2 years on the same terms. The company wants to both reduce its space and to reduce the cost per sq. ft. by about 25%. What’s the best way to renegotiate a lease?

Advice from the CEOs:

  • Gather information from multiple sources on current and forecasted cost of space in your market. Sources may include: other tenants, real estate agents, similar buildings, and walking the neighborhood to evaluate conditions. Look at newspaper ads and Craig’s List for both space & furniture.
  • Ask other tenants in your building whether have excess space that they would offer to you under favorable terms, or whether they are interested in your excess space. In either case ask for both price and terms.
  • Be careful with the information that you gain from real estate agents. They have more incentive to keep prices up than to find you the best deal. Balance their information with information that you gather from other sources.
  • Success in negation often is a matter of which side is best informed. Line up all of your options. Present these to your landlord and see if you can get what you need without having to move. For many landlords, a good tenant at a lower price is better than no tenant.

How Do You Communicate a Company Sale? Six Guidelines

Situation: A closely-held, non-public company is in negotiation for a possible sale. The CEO seeks guidance on when and how to communicate this to employees. What event would demand communication? The CEO is concerned that if the sale falls through this may significantly damage employee morale. How do you communicate a company sale?

Advice from the CEOs:

  • The trigger point for any employee communication will be due diligence. At this point, you may have a serious buyer.
    • Going into due diligence, limit updates to those who will be involved in the process.
    • Most acquisitions do not go through, so a broader communication risks disrupting the company – unless you are very confident that the sale will proceed.
    • Prior to due diligence, there is no benefit to communicating any possible sale to employees.
  • What message do you deliver to those who will be involved in due diligence?
    • We are entering a due diligence. This is an exercise that we’re doing for our own education so that we understand the value of the company. This is just a drill.
  • Keep your eye on the business and don’t be distracted by the offer.
  • Have a good idea of an acceptable sale price.
    • For a company with intellectual property or significant assets, three to five times EBITDA is a good starting point – unless the sale is a strategic buy to the buyer.
  • A possible deal is often spoiled by terms and conditions that the buyer attaches to the deal.
  • One buyer (at any one time) is the same as no buyer. When owners get serious about selling the company they will need a broker to develop multiple buyers, to advise them through the sale process and to defend their interests.

What are Best Ways to Boost Cash Flow? Five Guidelines

Situation: A company is frequently short of cash at payroll time. It has good revenue and profitability, but timing of receipts can make it difficult to meet payroll. Are the CEO and CFO doing something wrong, and what changes should they look at to better manage cash flow needs? What are best ways to boost cash flow?

  • All financing begins with your cash flow pattern! Your ability to manage cash flow is the foundation of credit worthiness. It is both a reflection of past performance and specific future performance expectations.
    • What can you do to optimize your situation?
      • First – put your own house in order!
      • Review your business model and the aspects of the business model that are causing cash flow challenges. Based on what you find, fine-tune your business model and its cash flow capacity. If receipts are the challenge, work with your customers to focus on timely payments.
      • Understand your financing needs in their full context. What short-term financing options are available? Will your bank offer you better terms on your line of credit to keep your business.
    • Stop, think and analyze before you act.
      • Framing:  View the problem in its full context!
      • Alternatives:  Consider all relevant choices!
      • Trade-offs:  Get more than you are giving up!
  • It is important to fine tune your business model, not just in slack times when you have the time, but also in good times so that you are well-prepared for the next slack period.
  • When times are flush, set aside funds to invest in analysis of your business model.
  • Special thanks and in memory of Eric Helfert, PhD for his advice in this discussion.

Would You Dedicate Staff to a Single Client? Five Considerations

Situation: A company has received an inquiry from a large client requesting that they dedicate a significant portion of their staff to that client. The company hasn’t done this in the past, and the CEO seeks advice on the advisability of this choice. Would you dedicate significant staff to a single client?

Advice from the CEOs:

  • Provided that the terms offered by the client are favorable, the proposition may make sense. However, there are certain terms that you may want to assure are included in the contract:
    • In return for your dedicating choice staff to this project, ask for a substantial upfront payment – perhaps 50% of the total contract – to reimburse you for the opportunity costs that you incur committing your resources to the project.
    • Insist that the contract allows interchangeability of personnel if circumstances prevent initial personnel from continuing with the project.
  • Internally, work to assure that this project does not adversely impact your culture.
  • Talk to other companies that you know who have had similar arrangements with large clients. This will give you an understanding of the benefits and pitfalls of the arrangements.
  • Do everything that you can to assure that this project does not distract from your broader business strategy. Cash from the project may be nice, but if it inhibits your overall business strategy it may not be worth it.
  • If the employees assigned to this project are not happy with their assignment, the project may lead to unwanted turnover.

Do You Continue a Difficult Partnership? Five Alternatives

Situation: A company has a key relationship with a major corporation. They recently completed work in Phase I of a multi-phase project which was fraught with difficulties. Now they are evaluating whether and how to proceed with Phase II. Do you continue a difficult partnership?

Advice from the CEOs:

  • What made Phase I difficult?
    • Initial work was done to original specs and on time. The partner then asked for additional work and a change to the original specs, but would not agree to pay for these changes. As a result, the company lost money on Phase I.
  • What alternatives exist?
    • In brief, you must fundamentally change the terms of engagement. You can convert everything to time and materials, so that when the partner makes changes or asks you to make changes, they pay as they go.
    • A second alternative is to reconstruct the project as a waterfall project with a fixed price up front. You agree to X iterations, at Y cost per iteration. Each iteration has a deadline and the work completed as of each deadline constitutes the final work on that iteration. You charge for additional iterations if the partner wants additional work after the final negotiated iteration.
    • A third alternative is to set a price that is 2x your estimated price, recognizing that there may be a need to change specifications during development. You will provide documentation of your time and effort. If at the agreed end of the project you have not used all of the funds budgeted, you refund the difference to the partner.
  • Adjust how you communicate with the partner as you renegotiate. Do not assume that silence constitutes agreement. Provide written documentation of your understanding at the close of each negotiation and invite them to correct any misunderstandings. Require that both sides sign this documentation to confirm agreement. Do not proceed until there is clear mutual understanding on all key points.
  • Purchase and use software to track any changes to requirements during the project. This will enable you to document both the changes requested and their waterfall effect on other portions of the project.