Street Smarts

Not all employees resign gracefully. Some try to sabotage your company on their way out. Here's how veteran entrepreneur Norm Brodsky deals with it.Dear Norm,I have a problem with some former employees who've started a business that directly competes with mine. Not that I mind healthy competition. In fact, I welcome it. But I do object strongly to the way these people conducted themselves as they were leaving. It began with a manager who, I later discovered, was starting a business and working on it while he was still my employee. He then began to recruit away other employees in key positions in sales, IT, and accounting. It turned out they were doing projects for the new business at the same time I was paying them-that is, using my company's resources to give their business a jump-start. Of course, when I found out, I fired them. But the new people I've hired are having a challenging time putting out fires set by the ones I got rid of. Before they left, the latter sabotaged my business by delaying deliveries and otherwise not taking care of clients. Their motive, I believe, was to get my clients so frustrated they could be easily stolen away. How should I deal with this situation?-Richard Gan, President, Computer Network Systems, Pasig City, The PhilippinesAs a business owner, I know of no worse feeling than the sense of betrayal you feel on learning that someone you trusted has stolen from your company. It's the same when people use your resources to start a competing business. They're thieves, too. Most of us have two gut reactions to such revelations: We think about getting revenge, and we feel we can no longer trust any of the people we work with. Those feelings are natural-but the worst thing you can do is to let them govern your actions.My advice to Richard Gan was to focus on stabilizing the business, holding on to as many customers as possible, and winning back those who have left. The best revenge he can have right now would be to succeed at all three. Granted, he probably has grounds to sue his old employees, but it would be a mistake, in my opinion, to pursue legal action. For one thing, it would be expensive. It would also distract him from his most urgent tasks: protecting and rebuilding his business. Moreover, a protracted court battle would keep the wound open. He'd be much better off putting his energy, time, and money into overcoming the damage the defectors have caused.At the same time, Richard needs to learn a lesson from this episode. He bears some responsibility for letting himself and his company get into such a vulnerable position. It's his job to make sure that customers receive the level of service they've been promised and feel loyal to the company, not just to the employees they interact with on a regular basis. If those employees are their exclusive contact with the company, the company's hold on the customers will be tenuous at best. The owner needs to touch them at least once or twice a year and let them know the company is looking out for them. Had Richard done that, he would probably have figured out much sooner what his disloyal employees were up to, and he could have minimized the damage they caused. Granted, he can't change the past. But at least he can avoid repeating it.

If you're considering buying a business, consider veteran entrepreneur Norm Brodsky's advice first.Dear Norm,Last May, my husband and I purchased the assets of a failing catering company that we believed had a strong client base and a great deal of potential. We're still in business, but we're struggling. Although I believe labor cost is the main issue, I'm afraid that if we lay people off, we won't have enough staff to meet demand. To make matters worse, our overhead is higher than we expected, because the figures we were given by the previous owner were not accurate. (For example, he showed us an electricity bill of $200 a month, but we're paying $900.) What should I do?-Emma Cerulli, Em & Seb | Boutique Catering, MontrealBuying a business is tricky. Every company has secrets you discover only after you own it for a while. Emma Cerulli and her husband, Sebastien Barthe, obviously didn't do enough research before buying their company. The business's actual cost of electricity should have been one of the easiest pieces of information to obtain. They simply had to examine a couple of years of utility bills, rather than looking at just one. They also should have determined before the purchase why the business was failing under the previous owner. Instead, they are still figuring it out almost a year later.Nevertheless, I think Sebastien and Emma are going to be all right. By the time I spoke to them, they had taken steps to get their food and labor costs in line with industry averages. They had also raised prices-which hadn't changed in nine years-and received no complaints from customers. I see no reason they can't begin earning a profit of eight percent to 10 percent of sales in fairly short order. I advised them to focus on that first. Once they are consistently making money, they can turn their attention to finding new business. I suggested they begin by looking for ways to offer additional services to their current customers.Finally, I urged them to talk to their lawyer about withholding future payments to the previous owner. Knowingly providing false information to a buyer is fraud. It would be a waste of time and money to pursue litigation, but-if what Sebastien and Emma say is true-they shouldn't pay the seller another dime.

When times are tough, customers take longer to pay their bills. You can count on it. Veteran entrepreneur Norm Brodsky says that's the wrong time to start thinking about how to deal with it.Most of the entrepreneurs I know have been having a tough time getting customers to pay on time, which always happens in a bad economy. Some people get so nervous that they plead with, or even start harassing, their customers. That seldom works and invariably creates resentment on both sides. After all, customers are also under pressure. And they have extra reason to be annoyed if you've never discussed payment terms with them.And chances are, you haven't. Many entrepreneurs, as well as most salespeople, make the mistake of thinking they've closed a sale when a prospective customer agrees to buy whatever it is they're selling. But no sale is final until the payment arrives—after all, a $10,000 receivable won't help with this week's payroll. Many people panic and do things like offering discounts to customers, who conclude they were previously being overcharged, or doing other things that damage their client relationships.The long-term solution is to work out payment terms with customers at the start of the relationship. That way, you and your customers will be clear from the get-go. And that mutual understanding will completely change the nature of the discussions you're able to have later on, when the economy sours and receivables lengthen. If customers don't pay on time, you're in a much stronger position to press them or to work out new payment schedules. Should you give a customer additional time, you'll be doing him or her a favor, which will strengthen the relationship instead of undermining it.And what if you haven't negotiated payment terms? At this point, there may not be much you can do to speed up customers' payments. So you may have to slow yours down accordingly. I'd turn to my vendors and explain the situation-your business is financially sound, but cash flow is a little tight, because everybody's paying late-and tell them that, until business improves, you'll be taking 15 more days than usual to pay your bills. If you've been a good customer, most vendors will acquiesce. As for those that yell and scream, I'd say, "Well, I understand your position. Maybe I'll just have to look for a new vendor. I don't want to, but I have to do what's best for my business." It's a rare vendor that won't relent.

Norm Brodsky advises on how to avoid the race to the bottom.Dear Norm,My partner and I have a business that rents photo booths for weddings, parties, and corporate events. My partner has developed software that uses blue-screen technology to create thousands of different backgrounds for the photos, which adds a whole new level of fun. As far as I can tell, we are the only company that offers this. I recently started another business that sells photo booths equipped with the software to people who want to start their own rental services. A large competitor of ours has sold a lot of standard photo booths by saying that a booth-rental business is one of the easiest and least expensive to start up. I know I can beat the company on price, but should I use its marketing approach or highlight the software that differentiates us?—Jolina Li, Owner, EntrePIXneur, Hartford, ConnecticutWhen you're starting a business, it's easy to fall into the trap of trying to compete against larger companies on price. That's what Jolina Li is considering—despite having a technology that could provide a strong competitive edge. That would be a big, and potentially fatal, mistake. When you build a business around having the lowest price, you soon find that there's always someone else around who can offer an even lower one. As a result, you are under constant pressure to keep reducing yours. At best, you end up with an unsustainable commodity business that's no fun to run and an obstacle to achieving the goal of becoming economically self-sufficient.In Jolina's case, moreover, competing on price is completely unnecessary. Her software gives her something extra to offer, which allows her to charge at least as much as her competitors and maybe even more. Either way, she can use the software to carve out a niche for her business at the high end of the market. Granted, some people will be looking for the least expensive photo booth they can find, but they're not the customers she should be going after. Rather, I suggested that she target those who are focused on creating successful businesses and therefore want to be sure to get a booth that comes with the best technology available—namely, hers.But I cautioned Jolina that a niche lasts only until competitors catch on and start copying you. That's what Jolina's rivals will do if they discover she's siphoning off sales. Yes, she could try to obtain a patent on the software, but the process is lengthy and costly, and there's no guarantee she'd get one.So, instead, I urged Jolina to start looking immediately for other ways to differentiate her service—preferably through methods that give her a longer-lasting edge. Her partner, for example, could use his tech skills to spruce up the business's website or boost its search-engine rankings. Or perhaps Jolina could establish exclusive relationships with websites that cater to party planners or to people looking for business opportunities. Or she might consider partnering with an organization that helps first-time entrepreneurs get their businesses up and running. That way, she could offer potential customers not just the tools to start a photo-booth-rental business but also the expertise to make it successful. There are many possibilities. I'm sure Jolina will come up with more on her own. The one thing she should not do is build her business around having the lowest price.

When buying a business, what's the going rate for hiring a broker, and who is responsible for paying it?Dear Norm,I'm planning to purchase a business but have concerns about the broker who found it for me. He wants to charge me a 25 percent commission. Because my offer was unsolicited, he says, the seller (a friend of his) isn't willing to pay the full commission but will split it with me if I allow the broker to represent both of us. Aren't commissions usually paid by the seller? Isn't that one awfully high? —Name WithheldI'm no fan of business brokers. I'm not saying they're all crooks. Some really do provide excellent service, especially those who focus on particular industries. But most business brokers are generalists. In other words, they claim to be so knowledgeable about business in general that they are able to do a good job advising any buyer or seller on any type of transaction in any industry. That's baloney on the face of it. In my experience, moreover, enough of these generalists are ethically challenged, so to speak, that it's a good idea to be very cautious when dealing with them.As for this particular broker, I told the writer—we'll call her Peggy—that I believe that what he was doing was unconscionable. A broker's fee is simply one component of the overall price of a deal. By asking Peggy to pay the fee, the broker was saying, in effect, that the price he originally quoted was not accurate. The actual price is 25 percent more. That is to say, he lied. Although he may claim to be representing Peggy in the transaction, it's clear that he's acting strictly in his own interest—and not at all in hers.Therein lies a lesson: Most brokers can be counted on to represent themselves. A broker's livelihood depends, after all, on 1. Making sure the deal gets done and 2. Doing it for as much money as possible. Of course, that's also what sellers want. I advised Peggy to hire a good lawyer to represent her and to have as little to do with this broker as possible. She later told me that she had decided not to go forward with the acquisition. Under the circumstances, I told her, that sounded like a smart move.