Tag Archives: Terms

How Do You Reset Pricing When The Landscape Changes? Four Parameters

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Situation: A company sells customized products and sets pricing per product/per customer. A large client has proposed to purchase product rights across a number of products and uses. Their technology is early in its expected 5-year life span. How should the company set pricing for this customer? How to you reset pricing when the landscape changes?

Advice from the CEOs:

  • Start with a series of questions: What is the value of your technology to the customer? How much competition do you face? What other solutions are available to the customer?
  • Based on this framework, ask contacts within the customer company open-ended questions that will reveal what is important to them including: What are their licensing objectives? What is their planned use of the technology? What protections do they seek? You need to understand these before you can make decisions on pricing.
  • There are several pricing scenarios: (1) Set up a scale with a declining pricing driven by volume. (2) Would they entertain a large lump sum payment now, non-transferable if the customer is acquired by another company? (3) Would they entertain a significant annual fee to cover a preset number of uses and volumes, with small increments for additional purchases? (4) Find out what the customer is willing to pay, but you set the terms. The final arrangement will depend on the answers to these questions as well as the priorities of the customer.
  • Ask what guarantees the customer desires to protect their position. This includes: the customer’s key risk factors and whether they want exclusive or usage rights. Exclusive is worth more.

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What is the Best Way to Respond to a Request to Reduce Price? Six Thoughts

Situation: An important customer just asked for a price reduction. The company’s production and materials costs have increased and eroded their margins. What is the best way to respond to a request to reduce price?

Advice from the CEOs:

  • The first question is whether the company is selling a commodity or a unique and differentiated product? Commodities rarely command a premium above market unless it is possible to bundle with differentiated delivery. Unique or differentiated products justify a premium because the customer has only two choices: purchase at your price or try to develop an alternate source.
  • The customer may have valid reasons to request a lower price. Counter with a combination of lower price and a lower level product to retain your margins. If the sale involves service, assign less expensive resources in return for a lower price to preserve margins. Define the trade-off to the customer so that it becomes their decision, not yours.
  • Adjust terminology. Use “run rate” vs. “price”, and speak of balancing resources assigned. Avoid cheapening or commoditizing your offering to meet the customer’s price demand.
  • Don’t assume that there is any such thing as a “fair price” or “fair margin”. The price is whatever the customer is willing to pay for your offering. The price increases the more unique your product or offering is, and the more critical to the customer’s needs.
  • Do NOT share your cost and margin information – this should be company policy.
  • Consider combinations of pricing, terms and delivery that keep you whole while offering the customer different price points.

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How Do You Boost Short-term Cash to Finance Growth? Three Approaches

Situation: The CEO of a company is seeing an upswing in work and backlog, but doesn’t have cash on hand to support the work. The bank won’t increase their credit line. How can they increase cash flow and better position themselves with the bank? How do you boost short-term cash flow to finance growth?

Advice from the CEOs:

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What are the Trade-offs of Becoming a Company Principal? Four Points

Situation: A senior employee is on a good growth track within her company. The CEO has stated that he believes that she has the potential to become a principal of the company in the future. What are the tradeoffs of becoming a company principal?
Advice from the CEOs:
• Becoming a principal involves both greater potential rewards than being an employee and greater potential risks. Create a chart with two columns. In one, list the potential rewards of having a stake in the company. In the other list the costs and potential liabilities. This will help to weigh the rewards against the liabilities.
• Areas to negotiate include voting rights, granting of options, understanding the perks of becoming a partner, and also the possibility of legal liability for any malfeasance that the company may commit.
• If you see liabilities that concern you talk to an attorney – your own, not the company’s – about how to address these liabilities in the terms of an employment contract as a principal.
• Evaluate the potential long term value of the ownership share being offered. Does the company have a buy-back policy for a principal’s ownership share and, if so, what are the terms?

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How Do You Boost Financial Understanding Within the Team? Five Points

Situation: A CEO is concerned that her team doesn’t appreciate the financial implication of their decisions on the company. This applies to both day-to-day decisions and strategic decisions that team leaders make. What can be done to better connect them and their decisions to the bottom line? How do you boost financial understanding within the team?
Advice from the CEOs:
• Go down the management levels from top to bottom and take the time to explain, in understandable terms, the company’s financial objectives, why they are important, how these are measured, how managers’ day to day decisions impact company performance, and the financial consequences of those decisions.
• Give employees a stake in company performance! For some this may be an ownership stake, for others it could be linking financial performance to their compensation and promotion track.
• The objective is for everyone to view the company as “ours”. This is a critical culture shift from the usual view in terms of “me vs. them”
• Work with the team to establish understandable and trackable formulas for profitable performance.
• Establish meaningful rewards for meeting the company’s plan and financial targets. When employees see a direct link between company financial performance and their paychecks they will pay attention.

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How Do You Negotiate a Merger? Eleven Points

Situation: A company is considering a merger with a smaller company. What are the important considerations to take into account in considering and negotiating a possible merger? How do you negotiate a merger?

Advice from the CEOs:

  • Look for synergies between the companies. During the negotiation, emphasize these and the mutual benefit available to both companies.
  • In a merger between a larger and smaller company look for the key motivations of each party. What does the smaller company have that the larger company wants? How much is that worth to them? Make a list.
  • Consider combining vs. merging. An alliance can be mutually beneficial while allowing both companies to retain independent ownership.
  • Look at earn out options in a purchase scenario. What are the possible terms and the financial implications of these?
  • Beware of the distraction that a merger will present to current day-to-day operations.
  • Identify other parties with whom mergers are possible. Why is the target partner better?
  • Partner prior to the merger – how do the two companies play together in the sand box? This can reveal cultural differences and differences in focus that will impact the value of the merger.
  • Consider an LLP option – a third Company that is the owner of the two merged companies. This may present tax and other advantages.
  • Look at Product vs. Service
    • Product is always worth something.
    • When service stops, it is worth nothing.
    • Key players must work together well or the service evaporates.
  • Never assume what the other party’s interests are. Make sure that both interests and priorities are discussed and evaluated during discussions between the parties.
  • Ask clarifying questions anytime a topic is raised that requires additional understanding.

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How Do You Evaluate Financing Options? Seven Key Points

Situation: A start-up company needs to raise cash to fund the achievement of key milestones. The founders have evaluated private equity, angel, and venture capital financing options. They believe that at their stage of development an angel is the best source of funds. What guidance can the group offer for negotiating with a private financier? How do you evaluate financing options?

Advice from the CEOs:

  • The important questions to answer are: who is the angel, what is the angel’s motivation, and what does the angel bring to the table?
  • What is the angel bringing to the table?
    • Is it money and connections? Who and how many people will be involved?
    • Do these individuals bring the expertise to take business to the next level and beyond?
  • Identify the strengths and weaknesses of the angel’s organization. Ask about other companies that the angel has financed. Talk to those companies about their experience with the angel.
  • Ask how long the angel plans to stay connected to the company.
    • Is the angel committed for the long-term or looking for a quick profit or exit and sale?
    • What happens after the angel leaves?
  • Validate statements made by and the experience of the angel.
    • How may IPOs has the individual or group been involved in?
    • What existing contacts do they have with additional potential funders or buyers?
    • Vet all of the claims and statements made by the angel.
  • Evaluate equity vs. cash funding and the prospects and terms that accompany future funding rounds.
  • What is the company’s long-term strategy?
    • Do the founders want to stay the course long-term or is it sale of the company to another entity?

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How Do You Manage Major Projects? Seven Points

Situation: A company conducts both engineering feasibility studies and development projects. These are high budget projects and must be managed diligently to prevent cost overruns. What have others done to assure that projects are planned and managed to budget? How do you manage major projects?

Advice from the CEOs:

  • What is the structure of most contracted projects?
    • Most projects are fixed price. They come from feasibility studies which are essentially “marketing” for future sales. Typical terms are 30% up front, with the other 30/30/10 upon achievement of milestones and completion of the project.
  • Get complete buy-in from the customer as part of the initial negotiation.
  • Stay ahead of expenses by billing in time to maintain positive cash flow from the projects.
  • Structure pricing so that custom work is profitable if the project mix is 50/50 custom vs. standard work.
  • Push-back if the customer wants to reduce project cost up-front.
  • Carefully document work papers – above what is required by the contract. Get buy-in for this in advance, during the initial negotiation.
  • Once the feasibility study is completed, revise the scope and deliverables of the work agreement based on findings from the study.
  • Separate the “concept” phase from the execution phase and charge a premium for the concept work.
    • Position this as a value to the customer.

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What are Effective Website Features and Metrics? Five Options

Situation: A CEO wants to revise his company’s website to be a more effective source of leads. What has worked well for others gaining leads from their companies’ websites? What has intrigued potential clients and prompted them to contact the company about its products and services? What are effective website features and metrics?

Advice from the CEOs:

  • Have as much usable content as possible – useable by those who visit the site. This will drive traffic to the site. Traffic will produce leads from a certain percent of users who are impressed by the company’s capabilities.
  • Does the site meet the company’s target customers’ needs? If so, are the search terms optimized to attract them to the site when they perform searches?
  • Create an interactive demo on the site that will be of interest to the company’s current customers and potential customers.
  • Use the company’s customer extranet to create a “wow” experience that will create buzz within client companies and help to attract additional business from those companies.
    • An extranet is an intranet that can be partially accessed by authorized outside users, enabling businesses to exchange information over the internet securely.
  • Put a freebie tool on the public site and extranet that helps clients to solve a frequent problem. This helps to segue customers and potential customers from personal use to product or service choice.
  • Whatever tools are used, include a unique link to each approach or tool and offer the customer a modest discount for using the link.
    • Counting the frequency of links used is a simple way to determine which tools or features are most effective with customers.

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What Do You Gain by Buying Out a Co-founder? Six Points

Situation: A CEO founded his company with a long-term friend. For several years, this co-founder has contributed little and has proven to be difficult with key employees. In an important sense, the co-founder has become a distraction. A challenge is that the co-founder is a significant shareholder. What do you gain by buying out a co-founder?

Advice from the CEOs:

  • First and foremost – peace of mind. While the CEO and his allies control a majority of shares there is no guarantee that this remains the case. Long-term it can cause headaches to have a large block of shares in the hands of someone who could be hostile. The challenge is gaining control of a solid majority of shares at a reasonable price.
  • How is the value of the co-founder’s shares determined?
    • In most minority interest situations, minority interest is discounted because it is of limited value to a non-company purchaser. While it may be necessary to pay a premium to gain controlling interest in the company, this will be a premium over the discounted minority interest value, not over the fair value for all shares.
  • There are two aspects to a purchase: price and terms. It is acceptable to accept the co-founder’s price, but insist on favorable terms, e.g., 10 years to pay at 5% interest.
    • Set the terms so that the company guarantees the payment, not the CEO personally.
  • At this point the co-founder is a disruptive force within the company. Act now before more damage is done.
    • As to order of business, take action with respect to the co-founder first, then negotiate the purchase of his shares after he is no longer an employee.
    • Be sure to communicate the decision effectively to the other employees. Speak to the long-term strategic value of the company, the CEO’s vision for the company, and a determination to build the company into a viable entity with a range of customers and growth opportunities for the team.
  • Important steps as you move forward:
    • Have a plan.
    • Speak to an attorney – the company should pay but this is the CEO’s attorney, not the company’s attorney. Assure that as CEO you limit personal exposure and do things appropriately.
    • Assure that the employees understand and support this action and that they clearly understand the plan going forward.
    • Offer the co-founder a more generous severance package than would ordinarily be considered prudent.
    • Fire the co-founder as soon as plans are in place and announce a Board Meeting 30 days hence to discuss the management restructuring.
  • As a final note, this is one of the most difficult things that must be done by a CEO. The co-founder has been a long-term friend. Nothing about this is easy. It is likely to get more painful before it gets better. In the long run, however, this can be better for both individuals. Work toward that objective.

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