Street Smarts

by Norm Brodsky

  The truth is, Mike probably didn’t even need a ful -time person. He could have found a col ege student who would do the work after school. Instead of paying someone $700 or $800 a week, he would be able to drastical y reduce, if not eliminate, the major aggravations in his life for $300 or $400 a week. Meanwhile, he’d be freed up to sel .

  It was a simple solution, and yet Mike hadn’t seen it, which wasn’t surprising to me. Like most entrepreneurs, he was a salesperson, and when salespeople run into a business problem, they instinctively look for ways to get more sales—because “good sales wash away most problems,” as the saying goes. They also tend to regard administrators, accountants, and clerks as “nonproductive” employees. But what those people do is almost as important as getting the sale in the first place. They make it possible for you to keep the customers you already have. Customers aren’t happy when you bil them late because you can’t get the paperwork done in time. They aren’t happy when they receive a bil for a fine that they may or may not have been responsible for incurring, and that you never warned them about, or told them how to avoid. And we al know what happens to unhappy customers.

  No doubt the time would come when Mike would real y need to hire a salesperson, but the impetus would come from opportunities that he saw and wanted to go after, not from the normal aggravations of running a business.

  No Accounting for Bad Advice

  As important as an outside perspective often is, there are some types of professionals you should be very wary about turning to for business advice. I’d put accountants at the top of the list. Please understand that I have nothing against accountants. I was trained as one myself, and I know they serve an important function. But it’s almost always a bad idea to go to an accountant for advice about business decisions. Accountants are basical y historians. That’s how they’ve been educated, and that’s how they think. They can do a great job of explaining what has happened in the past. But making things happen in the future? Forget about it. They don’t even know the right questions to ask, let alone how to get the results you’re looking for.

  Ask Norm

  Dear Norm:

  My husband and I own a consulting business that we’ve run successfully for fifteen years. Now we’re planning to start a retail wine business, and we think we need a board of advisers. What do you think?

  Leslie

  Dear Leslie:

  If you’re talking about an official group that meets regularly, I doubt you need one. A board is useful when you want to take an established business to the next level and you don’t have a management team with the experience to guide you. You might also need a board at some point to enhance your credibility with investors or important customers. For the majority of start-ups, however, a formal board of advisers just gets in the way. On the other hand, it’s always smart to get advice from experienced businesspeople. I’d talk to as many people as I could find with experience in wine retailing and similar businesses. You don’t need a board to do that.

  —Norm

  Consider the case of a young entrepreneur named Ken, who contacted me for help in dealing with a cash flow problem. He owed a printer $25,000 for some books he’d produced in connection with a business he was starting. The book was an annual trade directory for people who operated restaurants in New York City. It provided information about getting permits, buying kitchen supplies, finding contractors—that type of thing.

  Ken made money partly by sel ing advertising space to vendors, but mainly by sel ing the books to chefs and restaurateurs. The problem was, he hadn’t sold nearly enough of them. Of the 10,000 copies he’d had printed up, he had some 8,500 left over, and they were about to become out-of-date.

  So he was in rough shape. He had no cash, a warehouse ful of books he couldn’t sel , and an irate printer who was threatening legal action if his bil wasn’t paid. Meanwhile, Ken had to start work immediately on the next edition of the directory, or he’d be out of business. But how would he get it printed? And what if the first printer took him to court? He had no idea what the consequences might be. Understand, this is an honest, hardworking kid in his early twenties. He’d never been sued. He’d never dreamed it could happen. To be facing litigation was a total shock. He wasn’t panicking—not yet, at any rate—but he was very, very upset. I calmed him down and told him I’d help him find a solution.

  Now, to anyone with business experience, it’s obvious how Ken wound up in this mess. He was a victim of overoptimism. The numbers can save you from overoptimism by bringing you back to reality, but only if you ask the right questions—and to do that, you usual y need help from someone who is not emotional y involved and who knows the right questions to ask. Ken had gotten the idea that he could sel 10,000 of these directories. I asked him how long the sel ing season was in this business. “About four months,” he said. In other words, he had 120 days to make al his sales, assuming he worked seven days a week. That comes to an average of eighty-three per day. How could he do it? OK, he thought he could sel some by direct mail. There are 12,000 restaurants in New York City. If he got a terrific response rate—say, 5 percent—it would stil amount to only 600

  directories. So he’d have to make the vast majority of sales in person. We’re talking about one hundred sales cal s a day and a success rate of something like 78 percent. Working ten-hour days, he’d have to average ten sales cal s per hour, or one every six minutes. Impossible. Superman couldn’t pul it off.

  So why hadn’t somebody pointed this out to him? I asked him if he’d gone to anyone for advice before starting the business. “Just my accountant,” he said. “I gave him al the information, and he put together a cash flow statement showing it would al work out.” To be fair, the accountant was not entirely at fault here. He’d done what accountants do. You give them information, and they feed it back to you in a different form.

  Unless you’re basing your projections on past performance, they aren’t likely to question your assumptions. After al , they’re used to dealing with historical data. When you tel them you’re planning to sel 10,000 directories in four months, they treat it as fact.

  If you want business advice, you need to go to someone who has run a business over an extended period of time, and I’m talking about a real operating business, one that sel s something other than accredited, professional expertise. Unfortunately, people don’t always use the resources available to them. Ken, for one, knew about a guy with a related business, sel ing trade directories for the film industry. They’d never talked.

  Subsequently, Ken found out that the guy was sel ing 7,000 directories a year—after ten years in business. At least Ken’s mistake was not fatal. He worked out a deal to repay the printer in ful with regular monthly instal ments of $2,500. The printer was impressed with his honesty and agreed to print the new directory as wel . Thereafter, Ken got his business advice from businesspeople. As for the accountant, he did what he was good at: Ken’s taxes.

  Presumed Guilty

  I feel the same way about going to lawyers for business advice. Whenever a good deal fal s through or a promising negotiation goes awry, it’s usual y the lawyers who are blamed, and often they’re guilty as charged. Then again, there’s always another culprit in the shadows, namely, the client. Nine times out often, problems arise because clients al ow their lawyers to make business decisions for them—something the vast majority of lawyers are not qualified to do. Smart lawyers understand that and limit themselves to providing legal advice. Not-so-smart lawyers charge ahead and screw things up.

  Take the case of a person I know who tried for years to open a retail establishment. Let’s cal her Pol y. She figured that she needed to raise about $1.5 mil ion and had lined up a couple of investors who’d verbal y committed themselves to providing the bulk of the capital, but they hadn’t even begun discussing an investment agreement yet, and no money had changed hands. Meanwhile, Pol y had found a location she considered ideal. When she told the investors about it, they indicated that
they wanted a voice in negotiating the terms of the lease. Pol y decided to bring one of them to her next meeting with the landlord.

  It turned out to be a bad idea. The investor wanted to go over every detail. Among other things, he noted that the place needed extensive renovation. He estimated that it would cost $100,000 to bring the building up to code and insisted that the rent be adjusted accordingly. The landlord bristled and said he would do the work himself for $25,000. The rest of the meeting was equal y testy. Afterward, the landlord told Pol y,

  “Next time you come alone. You’re the decision maker, right? I don’t need to talk to anyone else.”

  So Pol y had a problem. She’d hoped that, by bringing the investor to the meeting, she could reach an understanding on the lease and the investment agreement more or less simultaneously, but that obviously wasn’t going to happen. Which one should she take care of first? It was a chicken-and-egg situation. The investors wouldn’t give her the money without a signed lease, but the landlord would never sign a lease unless he was confident that she’d be able to live up to her end of it, and she couldn’t give him that assurance without the money.

  Pol y realized that she needed to talk with her lawyer, if only because he would be involved in writing and reviewing any contract she might sign—

  whether a lease with the landlord or an agreement with the investors. She explained her dilemma. The lawyer said she should take care of the lease first. “You’ve got limited funds,” he said. “There’s no point in paying me to work on an investment document before you’re sure about getting the lease. If the lease fal s through, you wil have wasted a lot of money you can’t afford to lose.” That made sense to Pol y, and she was planning to start negotiations on the lease when she came to see me. She wanted to know how I thought she should handle the conflict between the landlord who wanted to get the deal done quickly and the investors who insisted on scrutinizing every sentence in the lease.

  I listened to her story and said, “I usual y don’t tel people what to do, but I’m going to make an exception in this case. Lawyers are not businesspeople. The advice your lawyer gave you is the worst I’ve ever heard. You absolutely should not do the lease first. You should do the investment document first. If you don’t, I can guarantee you that this deal wil never happen.” Pol y was obviously taken aback. “Listen,” I said.

  “You’re tel ing me that your biggest potential investor is a guy who negotiates to the nth degree.” She nodded. “You also tel me the landlord is a guy who likes to make things simple and get things done.” She agreed. I said, “Wel , look at this from a businessperson’s perspective. You’re going to negotiate the lease and get ready to sign it. Then what are you going to do?”

  “I’m going to work on the investment agreement and take it to the guys to sign and give me the money,” she said.

  “You’re going to take it to someone who negotiates to the nth degree and expect him to give you the money right away?” I asked.

  “No, that wil never happen,” she said.

  “Right, never happen,” I said. “He’l want to make changes. I know that I would if I were the main investor. So is your landlord wil ing to wait thirty, sixty, ninety days while you get the money? ”

  “Never,” she said.

  “Right,” I said. “He’l say, ‘Come back when you have the money.’ Even if you get it pretty quickly, you’ve planted a seed of doubt in his mind. You said you had it, and then you didn’t have it. He has to wonder about whether he can trust you to keep paying him for the next ten years. You’ve lost credibility. Do you get the picture?”

  “I’m beginning to,” Pol y said.

  “Your attorney shouldn’t be giving you business advice,” I said. “It’s nice that he doesn’t want to waste your money, but he’s going to kil the deal in the process because he’s not looking at the whole picture and he’s not taking into account the character of the people involved. He’s saying, ‘Why run up legal fees unnecessarily?’ That’s thinking like a lawyer, not a businessperson. If it were my business, I’d have already done the investment agreement and told the investors, ‘Let’s sign this, and I’l put the money in escrow pending your approval of the lease. It wil be there accruing interest for you in case things don’t work out.’ Then you could tel the landlord, ‘By the way, I have a mil ion dol ars in the bank, subject to the lease being approved. You don’t have to worry about getting paid.’ A big difference, right?”

  “Yes,” she said. “I hadn’t thought of that.”

  “What are the investors going to get for their investment, anyway?” I asked. “We haven’t discussed it yet,” she said.

  Then I real y knew she’d gotten bad advice. If you’ve ever tried to raise money, you know that there’s a huge difference between a verbal and a written commitment to invest. There’s an even bigger difference between a written commitment and the actual transfer of funds. At the last minute, people come up with al kinds of excuses as to why they can’t come through with the money they’ve promised. “I didn’t know you wanted it so soon.”

  “I just had a big margin cal .” “My wife won’t let me do it.” “My dog ate my checkbook.” Getting the capital was the biggest hurdle Pol y faced. It was pointless to spend time working on a lease until the investors demonstrated their commitment by putting money in an escrow account. Once they did, moreover, Pol y would have other options even if she wound up being unable to get acceptable terms on the building she’d been looking at.

  She could always come back to the investors and say, “This deal fel through, but I have another possibility if you’re stil interested—subject to your approval natural y.”

  Lawyers don’t think that way. They’re trained to focus on protecting their clients. Businesspeople focus on achieving their goals. Lawyers think their primary duty is to make sure clients aren’t exposed to potential liabilities. Businesspeople know that you sometimes have to be exposed to potential liabilities or you won’t get anywhere. That said, I can’t lay al the blame on Pol y’s lawyer for the bad advice he gave her. Part of the fault was hers. She’d gone to him asking for advice when she should have been asking for information. She should have inquired about the potential consequences of fol owing this or that course of action, with the understanding that she would then make up her own mind about what to do. Why didn’t she do that? I suspect it’s because, like many first-time entrepreneurs, she wasn’t yet ready to take responsibility for her decisions. Once you real y, truly understand and accept that responsibility, you become very selective about whom you go to for advice—and you don’t go to people whose main concern is to keep you from taking risks.

  Listen, most business decisions involve risk. That’s why the businessperson has to make them. Who else can say how much risk he or she is wil ing to live with? Unfortunately, some lawyers don’t understand that, as this one apparently didn’t. It was Pol y’s responsibility to set him straight and draw a clear line between giving legal advice and making business decisions. By not doing so, she ran the greatest risk of al —losing the opportunity to launch her business.

  You have to remember that lawyers are not businesspeople, although many of them would have you believe otherwise. In fact, the practice of law leads people to develop mental habits that are the opposite of those you need to be successful in business. I do not mean to disparage lawyers here. I went to law school after col ege, and I consider it one of the best decisions I ever made. Law school taught me a variety of skil s that have served me wel in business. It showed me how to take problems apart, analyze them, and figure out solutions. It taught me how to do research, and it forced me to develop a mental discipline that would have helped me no matter what I’d decided to do afterward. Because of my legal background, moreover, I have an edge now in business dealings. I can understand what legal documents say, and I know what’s going on when legal issues arise. I also get a certain respect when I walk into a meeting. Most important, I understand how lawyers think—and how
that limits their ability to make good business decisions.

  Indeed, during the brief time I practiced law, I developed some of the same mental habits I’m referring to. I learned the importance of focusing on the details, of crossing every t and dotting every i. I learned to look for any and every potential problem that might come back to haunt my clients and to make sure they were protected. When I went into business, I had to develop a whole different mind-set. I couldn’t afford to be too detail oriented or to focus too narrowly. I had to bear in mind al the changing factors that would ultimately determine my success or failure, and I had to be wil ing to make trade-offs in the interest of reaching my goal. I stil tried to anticipate problems, but with an eye toward dealing with them, not protecting myself from them. As a businessperson, I learned that problems can be great teachers. They didn’t stop me; they inspired me. I got a huge kick out of solving one and moving on to the next.

  Luckily, I’d practiced law for a short enough time that I was able to handle that transition. After ten or fifteen years in practice, I suspect, it would be extremely difficult for most lawyers to start thinking like a businessperson. By the same token, I doubt that I’d make a very good lawyer at this point. I’ve been in business for too many years. My mental habits are too deeply ingrained.

  That’s why I always get the best legal advice I can before I make a big decision. I need to be reminded of things I might otherwise overlook. But I have a clear understanding with any attorney I hire. I say, “Here’s the deal, and it’s very simple. What I want from you is good legal advice, period.

  You can protect me by explaining the potential legal consequences of any decision I might make. I don’t want you to tel me what to do from a business standpoint. I have other people I rely on for business advice.”

  You’d be surprised how difficult it is for some lawyers to fol ow those rules. I had one lawyer who said I was crazy to spend $20,000 in legal fees on a case that I knew in advance I would lose. He insisted it was a bad business decision. I believed that, in this instance, it was worth $20,000 to make a certain statement—and to avoid having to face similar problems in the future. The lawyer couldn’t accept that. I let him go.