Common Sense: Financing that Big Sale

Every now and then (about 3 times a week) a small business owner will ask me how s/he should finance a really big sale. Typically the deal will involve finding a shedload full of money to either gear up production or finance purchases.

I have lost count of the number of little guys I have assisted through a business closure because they insisted on getting involved in deals that were simply too big for them.

The main problem is that these deals are so alluring, and often come so well camouflaged.

Lets look at the process. Somebody comes to you with the potential of a huge deal. This thing is so big that you’re going to earn enough from this one client to meet your annual profit budget, or you’re going to double the size of your firm, or it involves a huge amount of prestige.

For instance, lets say your business supplies PCs. You do it well, and a client approaches and asks you to supply a mainframe. (It's bigger, more complex, and costs much, much more.)

The bait is set. Because of the size of the deal you spend an amazing amount of time focused on closing it, as well as investigating all the gearing up that you’re going need to do. These are hidden costs to your business, but the result is that your other marketing efforts typically slow down. With fewer sales happening it becomes more important that you close this deal, so you start shaving your price, or offering other expensive incentives to your prospect.

I am always astounded at us little guys who have no clue that big companies do this on purpose. The more we want the deal, the more we’re prepared to sacrifice en route. And the less we think through the consequences.

Finally the deal is signed. (Would you believe that often it isn't actually 'signed'. Very often it's a 'gentlemen's agreement, and very little paper backs up the agreement?) At this point our hero starts looking to borrow the money needed to fulfill the supply.

Lets fast-forward a while and look at how the deal eventually goes down, and how s/he gets hurt. The deal is so big that everything is stretched to the limit. Everything: all the systems, the finances, the people, the equipment, and the business owner.

The first hint of a challenge invokes huge anxiety, so everything gets thrown at fixing that challenge. This throws away most of the paper-thin profit. The shipping goes wrong; the paperwork isn’t up to scratch; the suppliers miss their deadlines;  suppliers supply inadequate paint/ glass/ hardware/ software/ coffee/ flour/ whatever

It doesn’t matter quite which of these comes to pass. One or more always happen.

The result is that the client has a reason to quibble. That reason always turns into a delayed cash-flow. I have even seen big firms and government departments delay the cash-flow without having the need to quibble at all!

Government simply runs out of funds whenever convenient, while the bigger players assume that everyone has the same access to finance that they have. This means they don't understand how their small sneeze can cause rapid and terminal pneumonia in us little people. That cash-flow delay almost always leads to the business going bust.

Is it worth the business risk? Absolutely!

Is it worth the personal risk? Absolutely not!

The first secret to taking on these big deals (and the consequent risks) is to protect yourself and your family. The only way to do that is via a Family Trust. This allows you to compartmentalise your personal life away from your business life. There are a whole bunch of tax advantages as well, but the most important benefit to you is that when your business universe is collapsing in a heap, you can make solid business decisions because your personal life is not at stake.

Contrast this with having everything on the line. Can any of us make intelligent business decisions if our family home, our kids’ education, and our parents’ retirement funds are about to be lost?

The second secret is to transfer the risk of the deal to someone else. Instead of trying to do everything yourself (and running all the attendant risks) act as the middleman, the broker. This means that you get the work done by someone else, and you transfer the financing risk to that entity. You simply take a commission for facilitating the deal, without any of the attendant costs and risks.

The third secret is to hang onto your common sense. Ask yourself why God is being so good to you today in dropping this heavenly deal into your lap. Often the answer is simple: The deal is so bad that nobody with any experience will touch it. You are being suckered. We little guys are a pretty moral bunch, so this thought never occurs to us. Ever wondered why banks ask for so much paper to  be signed before lending you a single cent? They know stuff we don’t.

The fourth secret is not to go backwards. If the deal involves a surety then you are going backwards at warp-speed. (This is where you sign your life away. This includes everything you have ever owned and will ever own.) Ask yourself a simple question: In doing this am I (the owner of the business) going forwards or backwards.

In signing some paperwork that gives Standard, ABSA, FNB, or Nedbank your home if something goes wrong, am I going backwards or forwards?

The CrashProof strategies that we give each Warrior will show you how to borrow without signing sureties, how to get sureties back, and how to nullify those that you can’t remember.

The bottom line about BIG deals. Before you even think of getting involved in one, make sure that you have drawn up a laager around your assets so that when the green stuff hits the fan, you still have a place to sleep.

This item was written June 30th, 2004 at Taste Coffee Shop in La Lucia Mall, Durban.