How not to get screwed in business...
Good post I read on reddit.com. Please excuse any harsh language. ELD
Summary
A short story over business to business relations. If you are an entrepreneur or working towards being self-employed, you need to read this post.
Body
Let's say I had two friends, Tim and Kevin that both started separate businesses. Kevin goes and finds a single customer that will generate $1,000,000 in sales for the year. Tim goes out and find 20 customers, but each customer only generates about $50,000 dollars a year in sales.
Well let’s say I was Kevin's one customer. I call Kevin up and say, ”Sup bro, I got an order for you, I’ll send in the Purchase order for $100,000.” Kevin’s ecstatic, holy s*** he’s never seen so much money before in his life. He just started this business and is so excited that he landed such a lucrative contract. He spent the last 4 years going through college to get his business degree, he got married to a lovely girl, they had a kid so she decides to be a stay at home mom at least till he’s old enough for school. He’s been slaving away in corporate America for the past 8 years to pay for college and save up enough to finally start his own business. He’s got this s*** on lock. He’s got the work ethic to make this deal happen and he’s going to crush it.
He takes out a mortgage on his home to front the startup loan from the bank. He heads out and buys all the materials needed to complete the job. It end up costing him $60,000 grand to complete the job, 40k isn’t a bad profile margin. From the moment he buys his material from his vendors, he has 30 days to pay them back. That’s the default pay period when business to business transaction happen, usually called Net 30.
Kevin thinks he might be able to get a bit more money out of the work though. He contacts me and tells me he underestimated the quote and it’s going to be an extra 30k to complete. Kevin assumes I’ll understand as this is his first time and I’ve been mentoring him through his whole upstart. I let him know that’s fine and we renew the purchase order for $130,000.
Now he’s going to make 70k profit! He doesn’t waste any time. From day 1 of him picking up materials he is off putting in the time, labor, sweat and tears to get this done. He’s going to make a killing.
Kevin and I meet at a trade show last year through mutual interest and I saw the passion in his eyes to get s*** done. I knew he had the hustle, he just need a push in the right direction and some incentive to get started. In this case, $1 million in sales a year is what I offered him.
Let's talk about me a little. I’m in my 50’s, been the president of a division of a billion dollar a year corporation for about 10 years now. Our division alone put out $230 million a year in sales. Our parent company that owns us reaches 1.6 billion a year. Kevin’s 1 million dollar account doesn’t even merit a second glance in the accounting office.
Back to Kevin. He finishes up his work. Spent all his material and the job is done. At 25 days since his first material purchase, he still has just under a week to pay back his vendor at the Net 30. Not to worry, vendors know the game, sometimes it takes a bit to get the money before the last tier supplier gets his check. He learned all this in business school.
He calls up the main office and gives my secretary the news. ”Great Mr Redwood is on vacation in the rockies for the week! When he gets back I’ll have him check out the work and you’ll be seeing the check in the mail within a few business days.” Kevin’s ecstatic, his first big deal. He’s about to bank 70k profit in a month.
Week goes by and nothing. He calls but doesn’t reach me. The secretary tells him that I’ll be back by tomorrow to inspect the work first hand. Great, he’s had to dig into his savings a bit to pacify the vendor till the check comes in. No worries though, Kevin and I became good friends during this last year and he still has money back in the bank.
Two weeks go by and nothing, He can’t reach me as i never gave him my private cell. He calls the main office, secretary tells him that I checked it out, work was awesome and the check is in the mail. Great, he had to spend some more savings on some emergency medical issue with his kid but now he’s about to bank 70k. He’s dreaming about what this job will be like at the end of the year. The vacation he’s going to be able to treat his family too. Hell, imagine what this will be like in 2 or 3 years. Kevin is literally on cloud 9. The past 8 years has brought him to this moment.
3 weeks, nothing. He’s starting to worry. He’s out almost 60 days and his vendor is starting to send notices. He calls but nothing.
4 weeks past Net 30. same run around.
5 weeks out. still no check.
6 weeks, same.
7 weeks, same.
8, same.
9 weeks. Kevin files for bankruptcy. His vendors take him to court for the money he owes. All his assets, house, everything, seized by the banks. His wife can’t stand him. How could she marry such a loser. How could this have happened? Hell, this is illegal right?
It is absolutely, one hundred percent, positively illegal to do what i just did to Kevin. But good luck trying to take my $230 million dollar a year company to court while you are in the middle of filing for bankruptcy and have no other income source, Kevin.
If you think this story is bulls*** or this would never happen in modern day America, I can be assured that you’ve never ran a business longer than a few years. Or, you at least have the privilege of not working in my line of work. I’m 25, I’ve been doing what i do for 10 years, I’ve seen it happen twice. My father has seen it happen more time than he can count and so have many others that I have been mentored by.
My father sat me down one day after he got a call from a company and he said, "Clint, one day you are going to get a call from a customer or new company. They are going to offer you more money than you've ever seen before in your life. It will be like holding a winning lottery ticket in your hand. All the s*** you can do with that amount of money will flash before you. It might be equal to or even dwarf our entire sales for the year. Everything in you will tell you to take the deal.
Don't ever take that deal."
A large corporation with tons of power goes out and finds some chump that’s eager and driven, they offer him a deal he can’t refuse, only to burn him, not pay, and there is s*** he can do about it. They hold such an immense amount of power and influence over you that you cannot possibly take them to court. They will drown you in legal bulls*** and it will cost you more than you can imagine.
Now, that 100k, that’s nothing. That’s like a week of sales for most small business. As in 5-50 employee sized businesses. I use 100k because to most ordinary people, that’s a lot of money. Oh, and that extra 30k Kevin thought he was getting out of me. Ha, whatever Kevin wants to hear is what Kevin will hear. I’m Kevin’s #1 sycophant, I’m the ”Yes” man.
In business, the more charming and the more enthusiastic a person is, the more you should be skeptical of them. It’s sometimes hard to identify a con man vs just some guy that’s really passionate/charismatic, that takes time and experience. But a good businessman weighs his options and never makes split decisions. A con man will tell you everything you want to hear without a second thought. If you want to know if you are getting conned, present them a serious issue that needs to be discussed, in this case a 30k quoting mistake. if it’s answered in a minute or less, you’ve got problems.
Conmen talk from an emotionally drive narrative not logic. They will play off your vibes and how you react, not through logic or planned out thoughts. They will have a basic plan for the con, as in me offering a million for enticing Kevin. But their delivery is always rooted in emotional manipulation and getting you to shut down your logical thought process. If you feel emotion, happiness, sadness, anything when making a business deal. Stop, don't make a decision, calm yourself, leave if need be, h*** take a week off if you have to. You must be grounded and level when you make giant decisions. Meditate if need be.
The company I saw get burned, they bought 1 million dollars in equipment and material to get a job from a very, VERY reputable corporation. You are probably imagining some slimball president of some shady corporation that could be morally and ethically relatable to Skynet if it was ran by Saul Goodman from Breaking Bad.
You’d be dead wrong.
This company that burnt them was a company every single one of you knows of. Hell, half of you probably own an appliance by them. I’ll just repeat that again though if it didn’t set in though. They spent $1,000,000 and didn’t get a dime, filed for bankruptcy a few months later. By a company that pretty much all of you know and trust to make good products.
Oh, and that company that got burnt for 1 million? Ya, that wasn’t some dude like Kevin. That was a company that was in business since the 80’s.
“So what went wrong? F***, this is hella illegal!” Doesn’t matter what is legal or illegal, it’s what you can get away with. You think laws stop people from doing things? F*** no, we break laws all the time, the only thing that stops people F***ing one another over is if they can get away with it or not.
Bullpill advice would be, take them to court, try to get your money out of them. It will be alright. We believe in you and we are here for you.(random people on the internet that he probably tried to consolidate with or advice some friend gave him).
I’ll tell you right now that advice is worth less than the air and calories it took to say it. here’s the redpill advice. Kevin, you F***ed up. You let your emotions and the alluring of dollar signs sway your decision making skills. You saw $1,000,000 written out and said, ”Holy s***, One million dollars, sign me up.” You let emotion, lust and greed trump logic and planning. You saw a big shinny number, from a company you know and love, that everyone knows and loves, that’s been around forever and you took that as merit for them to be a trustworthy client. Instead of sitting down and looking ahead of what they could do to you if you accept their deal. You thought you were playing blackjack when they were playing chess. You made one move and thought you won the game and didn’t think anything past that. You broke the #1 golden rule of business.
Never have all your eggs in one basket
Let's take a look back at Tim. I bet you forgot about Tim. In the amount of time Kevin went from 25k in the bank and owning a home to being homeless, Tim cleared 5 orders of 20k each, cost him 15k in materials each, resulting in 25k profit and 100K sales for the month. Good job Tim.
Why? because none of Tim’s customers have power over him. If I tried to pull the s*** that I pulled on Kevin, Tim can fall back onto his other accounts to support his business and life style, and have the money to take me to court in the process.
Tim, can’t be F***ed with, because Tim has abundance.
Lessons learned
This is just one rule of business that I’ve learned through the years being mentored by some truly alpha men. I never correlated it with abundance mentality till TRP though. But it is the #1 rule of business and it’s one they constantly drill into my head. The s*** these men have shared with me and taught me is invaluable and stuff you can’t find in textbooks. It’s only learned through experience. Textbooks will teach you what to do if everyone plays by the rules. It won’t teach you a damn thing when it comes to playing the game with people that break the rules.
There is a lot of benefits to the golden rule than foreseeing getting F***ed over. For instance it’s not always some d***bag trying to F*** you. Maybe one of your customers goes out of business just due to the economy. Trust me, they won’t tell you they are going under, a lot of times you won’t even know, their purchase orders will just stop coming in or they just go radio silent. If they were 25% of your business, you’ve got problems. You may not go under but you will be laying employees off or taking a pay cut yourself.
At our company we tried to make sure none of our customers gets above 10% of our sales for the year. 5-7% is the sweet zone. If you can manage that, no customer can F*** with you. you should track these number religiously, because trust me, your customers know how much money they pay you a year. And they will use that number to throw their weight around. If you don’t know your % then you don’t know what kind of negotiating power you have. Basic Sun Tzu teachings, ”Know yourself and know your enemy.”
If rule # 1 is never have all your eggs in one basket, then #2 is never let your customer know how many baskets you have or how big their basket is(also a Sun Tzu teaching). Customers will straight up ask you sometimes, ”How much of our work is your business.” If they are above 10%, your answer to that question is always, ”I have no idea off the top of my head, I’d have to speak with my accountant on that.”. They can’t use what they don’t know against you. If it’s below 10%, you tell them exactly what their % is so they know they can’t F*** with you.
Basic misdirection and power play.
If a customer is over 25% of your business, you should be sweating bullets every day, you should be losing sleep and pulling your F***ing hair out. You should not be eating till you secure another account and drop that 25% to 10%. At my company we have dynamic employees, we don’t have dedicated sales reps as sometimes sales are not what we need. When customers hit 15-20%, sales reps head out the door looking for new work or we contact current customers for more work to level the playing field. Growing horizontally is always better than vertically. This is also why consumer goods are great to get into, then you literally have thousands of customers that don’t even equate to 0.1% of your sales. No one owns you and no one can bully you.
If a customer knows they are 35%+ of your work, they now own your business.