Dealing with Contracts, Vendors, and Collections
I was so mad I was spitting nails. I shouldn’t admit this, but my eyes were bugging out of my head, my heart was pounding, my fists were doubled up, and I was full-on mad. Pete was on the other end of the phone telling me he was breaking up with me and there was nothing I could do to stop him. “But we have a contract… Doesn’t that mean anything to you?” I virtually shouted at the guy. I just about exploded when he added insult to injury by laughing at me and saying, “Well, boy, you are just going to have to sue me then.”
It was early in my career and I was still so naive that I thought when I had a contract with someone it meant they had to keep their word. A couple of weeks before I had been to a city where Pete owned a radio station; we had done an event there and had made Pete a pile of money. Just a few days later we got notice that he was taking our show off his radio station immediately, in violation of our one-year contract. He had waited until I helped him make money and then messed me over. I was left with two choices: sue him, spending more than I would likely recoup, or grit my teeth and walk away. Sometimes we have to enter lawsuits, and other times it just isn’t worth it.
Contracts are not protection against a lawsuit. You can have a contract and still get sued, forcing you to defend the contract. Contracts are not a guarantee of people performing or doing what they say. Contracts do not have mystical powers that make people who have no integrity keep their word. Contracts do not have mystical powers to make people competent who aren’t. So when you or I utter the words “But I have a contract!” it indicates that you are naive about contracts. You will struggle in business if you try to use words and paper in the form of a contract to create a reality that just isn’t there. People who are crooks will crook you even if you have a contract. People who can’t sing can’t start just because they have a contract. In business, lower your expectations of the power a contract actually has.
Donald Miller says the happiest people are the people with low expectations.* When you wield a contract like it has the power to make people something they aren’t you will spend a good deal of time being angry and unhappy in business. Lower your expectations about the power a contract has.
If contracts are useless, why do we use them? I didn’t say contracts are useless, I said to have reality-based expectations about what a contract is and isn’t. A contract doesn’t make a crook straight and it won’t turn a cat into a canary. A contract is only as good as the people you are dealing with, so deal only with good people. There are a few occasions where you can spend a pile of money and have a judge force someone to perform, but it is, by and large, an unprofitable process for you; the lawyers love it, but you won’t. Sometimes, on principle or to set a marketplace precedent, you have to fight to the legal death regardless of cost—and I have been in a few of those. I will tell you that even after you win you have the nagging feeling that you really lost. Don’t deal with crooks or incompetent people thinking your contract will protect you; it won’t.
Contracts are merely communication on the front end about the points of the deal. Contracts do help people of integrity keep their word in case in the busyness of life they forget what they committed to. I have been ready to leave a deal only to go pull the contract and remind myself what my promise was, so we stayed. Attorneys call this completed and thorough communication “a meeting of the minds.” You should do contracts with good people so you and the other party can stick to what was promised, and you should do those contracts in writing. If their handshake isn’t good their contract won’t be either. But write it down to help communication and to help memory. The old saying is that a verbal contract is worth the paper it is written on. An old attorney friend of mine says, “If it isn’t in writing it never happened.” Use written contracts only to ensure memory and communication among quality people is executed, but don’t expect higher of the contract than you do the people in the deal.
I am not an attorney and this is not a law book, so seek the counsel of your attorney before following any of my advice. That is not a legal disclaimer, it is a fact. I am not trying to teach law here. As an EntreLeader, however, I do have some basics on contracts I want you to grasp.
Do have your attorney draft the contract if you aren’t using a standardized form. The drafting attorney has the advantage of producing a document that pulls the fine points to your favor. Many of those points in your favor are not the items in the contract but the ones left out intentionally. Have you ever heard about George Lucas’s original contract with Fox for the first Star Wars movie? Lucas’s brilliance was that he kept all merchandising rights in the contract. He gave up his director’s salary in exchange for 40 percent of the box office sales and all merchandising rights. The studio didn’t really care, but Lucas wanted to be able to make shirts and posters to promote the movie himself in case the studio didn’t do a good enough marketing job. He owns a piece of everything that carries a Star Wars logo because of that part of the contract, which has made him an incredible fortune.
Make sure you are dealing with a competent attorney when they draft the core document. It is common practice among many judges to rule for the attorney who did not draft the document on points that are confusing or poorly worded, so make sure you have a good contract lawyer creating your draft.
Do plan your deal for best-case scenarios but contract for all worst-case scenarios as well. Entrepreneurial types are all about putting down on paper what happens when everything works and we all get rich but are notorious for not facing the possible downsides of a deal. We often call the downsides of the deal the “D’s” of the deal.
Detail what happens to the deal in the event someone does not do what they are supposed to. What happens in the event one party becomes bankrupt? I actually have in some of my publishing agreements that if the publisher goes into bankruptcy all rights to my books revert to me. One CEO asked me why I would want such a clause. I wanted that clause because I was doing a publishing deal with a publisher and that CEO, not with a bankruptcy trustee running the company until he can sell it out of bankruptcy. I don’t want one of my books trapped in a deal gone bad.
What happens to the deal if one party dies? You might be fine working with the widow or family of the party you contracted with, but you really might not want to either. When I am contracted to endorse a company my endorsement would be of very limited value if I died, so that contract would obviously need to end at my death. Consider what would need to happen in a given deal if one of the parties were to die. A lot of our company runs off of me acting as the product. My speaking, or publishing, or radio deals have to address my company’s responsibility at my death.
What happens in the event one of the parties becomes disabled? This can be very important if the contract relies on one or both parties personally. Many entertainers’ contracts with their promoters prohibit them from skydiving, scuba diving, or even snow skiing. It would be tough to stand onstage playing a guitar in a full cast because a multimillion-dollar concert obligation has to be met.
What happens if the other party gets involved in bad behaviors that will keep them from doing the deal as agreed? Cocaine makes people absolutely insane, so write up your agreement with a release option should “moral turpitude” occur. Moral turpitude covers a lot of possible misbehavior so it is a good idea to spell it out where needed. Remember, if you are dealing with a known drug user, just don’t do a deal; walk away before you bother to draw up a contract.
Do you want to be forced to complete the contract with the other party’s crazy ex-wife who didn’t seem so crazy when you all first met? Contracts can have a value, and the other party’s value could be given to a spouse in a divorce proceeding unless you specifically say otherwise in the contract. Another idea here is you can contract with a company only so long as Joe Smith is their CEO, and in the event Joe leaves it will be your sole option to stay in the deal. You would only do this if Joe’s presence is what makes the deal happen the way you want it to.
Believe it or not, sometimes people just lose interest. You can be stuck in a contract where the other side just doesn’t care and wants to walk away. Really what you are doing here is deciding in advance how things will be split and what the concessions or buyout would be in the event one party wants to leave. A college football coach who wants to leave and take a job at another place often has a predetermined buyout clause in his contract. This makes breaking up easier to do.
What happens in the event of destruction, hurricanes, famine, war, acts of God? This clause is generally mentioned in most contracts but think about it in light of what it means to the economy in the event the U.S. goes to war. What if you have a supplier in Florida and a hurricane takes them out? This clause gives you the opportunity to define your options should one of these events occur.
Do make sure your contracts are win-win. I suggest only doing deals that cause everyone to win. Don’t go into deals where the other party is driven out of business if there is a failure. Only do deals that you will be proud of ten years later.
Do make sure all parties have fully executed copies. In some states with some types of contracts your contract is not binding unless all parties have fully executed copies. Remember the purpose is to have a meeting of the minds, full communication, which is represented by fully executed copies in everyone’s hands.
Do read every word and have someone explain the parts you don’t understand. On unimportant or small deals you balance your time invested versus the risk you take, but on big deals invest the time to know what you are getting into.
Do negotiate the right to renew or extend the deal. This right is particularly handy for a real estate lease or a production contract. If you can lock in how much you are paying for your widget you can more accurately predict cash and profits. If you can lock in your location at your option you can stabilize your business.
We originally leased our building for five years with three five-year options at a predetermined price. There was no downside because at the end of five years if the predetermined price was higher than the market price I didn’t have to take it and I could renegotiate, but if rents in the area shot up I had locked in a great deal and would simply exercise the option.
We don’t use employment contracts at our company. As you read in other chapters we treat our team wonderfully because it is the right thing to do and because it pays dividends in the long run to treat people right. We don’t need a contract to make us do those things. We want to do the things we do from a right heart and not from some false compulsion. When it is time for someone to leave our company we want them to leave immediately with as little drama and hassle as possible. We are good to people who quit and who we fire, but never because it is our contractual obligation. We operate in Tennessee, which is an employee-at-will state. Our state, like most states, allows a business to fire someone at any time for any reason other than discrimination. Legally I can decide I don’t like you today and fire you for that reason, and you would have no legal recourse. Again, the EntreLeader values his team and never mistreats them, but I am discussing our legal obligation. We don’t have, nor will we have, a legal employment obligation arising from a contract. I don’t want someone to stay on my team because of their contractual obligation; this would mean they have no passion, have no creativity, and add a lousy element to our culture. Nor do I want to be forced to keep someone when it is time they leave.
Don’t try to contract away a law, a statute. For instance, you can’t contract away a legal liability. I had a landlord of an office building submit a lease to us stating he had no liability for injury on the property. He can’t get rid of his liability. If someone should trip and fall due to faulty sidewalks, the owner of the building would be liable, and no contract can get rid of that liability. The lease could have had my company indemnify (protect) him from liability, but a contract can’t remove the fact that he is liable. A contract can’t make a criminal act legal. You can have a contract or a lease that says serving alcohol to minors is fine, but it still will get the company in a world of trouble if you do.
Definition time. Take the time to look at some basics so you know what you are getting into when you sign a deal. Learn the definition and meaning of the miscellaneous clauses so you aren’t surprised later on.
Simply stated, a severability clause says that if one clause is invalid the whole contract isn’t trash. In some states, and with some judges, without this clause the good parts of the contract are thrown out with the bad.
Common sense should tell you that the entire agreement is what’s written in the contract, but this clause states that clearly. I am shocked at the number of times over the years someone has proposed that we have a contract, but we don’t need to put “that” part in writing. Translation: “that” will never happen. If they aren’t willing to put it in writing it won’t happen.
The state-of-venue clause says in what state the courts will hear any dispute over this contract. This seems like a small point until you have to buy airline tickets, pay out-of-state lawyers, and then find out the judge plays golf with the guy you are suing. This can be a very expensive mistake. Generally you want the state of venue to be your state unless another state has a particular law on the books in your favor.
I was negotiating a deal for a series pilot with CBS using a rather expensive attorney out of Washington, DC. When the state of venue came up for discussion I said we want it to be my home state of Tennessee, and my attorney quickly corrected me, saying, “No, we want California.” He explained to me that because so much of the TV and movie industry is in California, the laws there are the most thorough and in favor of the talent. Since I was contracting to be the “talent” I easily grasped that idea and let CBS choose California as the state of venue. There was never a dispute with them—on the contrary, we had a great relationship—but I still learned something in the contract negotiation.
Don’t try to do a contract with no end, in perpetuity. In most states most contracts are not valid without an end date.
If your company is an LLC or is incorporated, then be careful to never sign personally. Always sign as the office you hold on behalf of the company. If one of my team puts a document of importance on my desk to sign as Dave Ramsey it is returned and retyped for me to sign as Dave Ramsey, president of our company. I only sign as an officer of our company to avoid personal liability.
If you aren’t careful to do business only as a corporation or an LLC then you can personally be held liable for a big mess. Being held personally liable for your company is known as “piercing the corporate veil.” So if you just put your name with no title referencing that you are signing on behalf of a company, that vendor can sue you personally as well as your company. So that defeats one of the big reasons for forming a corporation or LLC in the first place.
Personally signing can apply to debt as well. In most every case small-business people will have to sign personally to borrow; that is not what I am talking about here. Remember, though, that I recommend not taking on debt, so that eliminates any debt liability anyway.
Collecting money owed to your business can be frustrating and maddening. The main rule of thumb we use for collections is, if you have a collections problem you really have some other problem, like you are selling wrong. Somewhere in the establishment of the relationship the customer got confused about when and how they had to pay. The time to solve a collections problem is long before you have one, as you are selling the customer.
The time to solve a collections problem is long before you have one, as you are selling the customer.
I told you in chapter 9 that the best receivable is one you don’t have. If you choose a business model that has you billing your customers you will face collections problems to the extent that your sale isn’t made properly. A proper sale is one that is made to a qualified prospect. And while the sense of serving the customer is important, you should not be begging them to be a customer, so don’t set up the spirit of the deal so that your customer becomes your boss.
I think my real estate background prepared me to avoid collections problems. Think of your customers as tenants in a rental. You want to market to them to get a tenant, you want them to want the house, but when they move into your property you want them to respect you enough to take care of the house and pay on time.
Serve your customers without becoming subservient. Salespeople who beg instead of serve end up begging for the customer’s money because the customer cops an attitude, thinking they have the upper hand. The sale made properly involves qualifying the customer financially and setting the terms and tone of the relationship after the sale. We don’t have belligerent or nonpaying customers for long because we fire them as a customer.
When you find a problem area or a category of customer that has constant problems paying, then either change the terms of the deal with them or don’t do business with that type. You are better off not making a sale than having people take your goods or services and not pay.
When I first got into real estate I had a lot of lower-income weekly rentals. I found out very quickly that I couldn’t give an inch when qualifying or collecting because I would not only lose that rental income, but word would get out that I could be “had.” Consequently I had a “renter talk” before they moved in where I was basically insulting to the renter about paying on time and not conducting any criminal activity in the house. If I could make them mad before they moved in, I learned that they were going to be trouble later, but if they planned to pay and didn’t plan on criminal activity, then they weren’t insulted at all. I started the relationship with fair and firm terms of operation, then if trouble came I had the relational room to give grace to someone who communicated about hard times without appearing weak.
I am not suggesting that you insult your customer, but the spirit of how a relationship is to be conducted is at the core of collections problems. Collections problems are not the problem, they are the symptom.
When a client is one day late they get a courtesy call and a kind reminder of the promise of payment they made. After the late payment is made a salesman makes a follow-up call to reset the customer’s mind on how payment will work in the future and kindly make sure there is no misunderstanding or lack of service on our part.
If the payment doesn’t come in we follow up with another phone call and begin sending notices. In most businesses the accounts that run over ninety days (unless those are the terms) have a very low probability of collection. Accounts at sixty days or later should have delivery or service stopped or be put on a COD (cash on delivery) basis. When you stop doing business with the account you limit your losses, but they will consider you a low priority because they will keep active accounts happy first.
When we have a customer go bad we stop and ask ourselves what we did wrong to get ourselves into this predicament. A small level of loss is acceptable and normal, but even that can creep up on you. In the 1990s when the dot-com boom was happening we had about three dot-coms advertising on our show that went bad. They were large accounts for us and together amounted to over $100,000—which was a big ouch. So we changed our advertising policy. If their company name or primary business model is Internet-based, now they have to prepay to advertise—no billing.
When a receivable goes bad you need a process you automatically go through. From experience I will tell you, when you are a small business, the first time or two this happens it is an emotional experience. You will get angry, as if you have been stolen from. Since you know this emotion and this problem is coming you need to have a collections plan. First go through the gentle steps we outlined above to try to collect. Second, be sure you analyze what mistakes your company made to put you in this place. Third, decide how to handle a completely bad debt.
You should forgive the debt in two circumstances: one, if your company has screwed up in serving the customer by providing a bad product or service, or two, if the person owing it is flat broke and owns nothing.
When a debt goes bad you have only two choices. You can forgive the debt or you can file a lawsuit. You should forgive the debt in two circumstances: one, if your company has screwed up in serving the customer by providing a bad product or service, or two, if the person owing it is flat broke and owns nothing.
In a spiritual discussion there is a difference between forgiveness and reconciliation. If a criminal mugs you and steals your purse, from a spiritual perspective, it is fine to be hurt and angry. It is best to forgive that person, not for their sake, but for yours, because that hurt and anger will eat you alive. However, many people confuse forgiveness with reconciliation. While you should forgive the mugger, it does not mean you should invite them over to dinner or to babysit your kids. If a mean dog bites you, forgive it, but stay away from it; it bites.
Debt owed to you or your company should be viewed the same way. When appropriate you should forgive the debt. However, that does not mean I am suggesting you continue to do business or grant payment terms to that person or company again. There is a difference between forgiveness and reconciliation. That dog bites.
We used to have a saying about complaints and company screwups. I told our team, “If it gets to me it’s free.” What that means is that my team needs to solve the problem for and with the customer, wowing them so we don’t have upset customers in the marketplace. If the problem gets all the way to me and I have to handle the screwups, I am going to give the customer everything in sight, free, and charge it to someone’s profit-sharing or commission check. We haven’t had company screwups hit my desk except in rare cases in years. Don’t try to collect money from someone you didn’t serve; that is adding insult to injury. Just forgive the debt and give them some more free stuff to say you are sorry.
You should also forgive a bad debt and walk away when the person or company is broke and owns nothing. It is simple: they can’t pay, and you can’t get blood out of a rock. You can be angry and hit the rock with a hammer over and over again, but it won’t bleed. The broke person hardest to forgive is the one who isn’t sorry about not paying. The arrogance of not paying me what is owed me and then not even having the honor to care makes me want to sue them or hit back in some manner. Don’t waste your emotional energy or money. You will win the lawsuit and then win a judgment against nothing; suing someone doesn’t make them grow money. Save your money and your stress level. Move on to the next deal using the energy you will waste hitting a rock with a hammer.
It is much easier to have mercy on and forgive the debt of the broke person who owes you but can’t pay and is deeply distressed about it. One of the dot-coms I mentioned above was run by a great guy who started a website to help people with careers. The site was before its time and didn’t make money. No matter how many leads my radio ads sent him, his business model was bad and he was doomed. The poor guy came into my office to meet with me and one of our EVPs owing us about $22,000. We had researched what was going on with the guy and found that his home had been foreclosed on, his wife had left him, and the computers that operated the business were repossessed. He sat at my conference table with tears in his eyes telling us the whole story. Because he was truly broke and because I have been there and because he promised to pay me someday, I reached across the table and wrote “Paid in Full” on his invoice and set him free. He was relieved, and we went on to the next deal with the energy we could have wasted beating this poor guy up. We really needed the $22,000, but that didn’t matter; he didn’t have it and wasn’t going to have it any time soon, and he was man enough to meet in person and have honor.
As a Christian I also reserve the right to forgive a debt if I feel like God is telling me in my prayer time to forgive it. That is weird for some people to try to understand, and in truth it’s sometimes hard to know if I am just feeling sorry for someone or if it is God’s voice. Some days those two things are one and the same.
Sometimes a debt is owed and unpaid by a broke person, but you still feel like they should pay something, and they really want to. We sold ads to a small insurance firm that went out of business owing us $12,500. The guy demanded that he repay us. We looked at the situation and, knowing we weren’t going to collect from this guy any time soon, offered to forgive the debt, but he virtually demanded to pay. He would send in $25 or $10 every month. That was a nice gesture, but mathematically that is all it was, a gesture. It was costing us more in man-hours in accounting to post the payments than we were actually receiving. I remembered a story Larry Burkett once told about letting someone work off their debt at a nonprofit or a ministry. We called this gentleman in and asked him what he did as a service in the community. He explained that when his mother was in a nursing home he observed how many residents had no visitors, so after his mother’s death he continued to go to the nursing home at least once a month to read to residents. We offered him the deal of a lifetime: read to nursing home residents and keep a time sheet. We credited him $100 an hour toward his debt and he worked off the whole debt ministering to others. He felt great, nice people in a nursing home got read to, and truthfully—before you think of me as some great guy—we weren’t going to see that money anyway.
The only time I think you should consider suing is when the offending customer has the money and just won’t pay. Your company didn’t mess up and the jerks just won’t pay even though they are perfectly able. Also, the debt must be of great size. You don’t want to spend thousands of dollars in attorney fees and court costs to collect $300. I will tell you that most people do not realize what a beehive a lawsuit is. Winnie the Pooh, if you get that hive buzzing you are in for a long fight even if the honey is yours.
I am not afraid of a fight and some fights are worth having. However, enter lawsuits only after you are ready to lay siege and wait years for the outcome. Enter lawsuits only if you have the financial and emotional well deep enough to stay the course until you win. As far as collection lawsuits, I have filed only two as of this writing, and even though the parties were wrong and had the assets, we spent more than was owed and ultimately collected nothing. In the first case they finally went into bankruptcy and in the second they drained the assets from the company. We attempted to pierce that corporate veil, but it didn’t work. My conclusion is that lawsuits are almost never profitable. You can win a moral victory, but the cost is high.
All businesses outsource. There are the vendors that you work with on a very small basis, basically drive-by vendors. Then there are the vendors that provide you with services or products essential to your operation. These essential vendors become quasi-partners. You develop personal relationships with them and watch them prosper from the business you give them. They often become friends, and at some point you will find that many have been doing business with you longer than much of your team has been on board.
These vendor relationships are so important I am going to spend the balance of this chapter talking about how to properly select and work with vendors. The mistakes made on these basics cost businesses millions of dollars every year. This is the mechanics of how we actually operate our business. If someone wants to be on my leadership team they have to know and practice this material. The bigger or more essential the vendor is to your operation the more important these points are.
A high-quality long-term relationship with an essential vendor can only be established and maintained if the vendor has four key elements.
Trust is the basis for any relationship. The depth of the relationship, whether business or personal, is limited to the depth of trust. I have learned the hard way how essential it is for essential vendors to be led by men and women of integrity. You can overcome a lot of bumps in the road working through deals that have gone bad when dealing with quality people. When dealing with your main vendors watch for subtle changes and integrity breakdowns. These signs are your warning lights that the boiler has cracks and may blow at any time.
If an essential vendor or supplier misses a delivery or drops their quality at the wrong time you can be left in a position where you can’t serve your customer. Your customer doesn’t care about your supplier problems, they just care that they weren’t served.
Integrity at the top will allow your relationship to survive the normal bumps and bruises of an imperfect world. In the first chapter I talked about leadership from the top down. I discussed how “the anointing drops from the beard” means that as goes the king, so goes the kingdom.
A few years back we had an essential vendor that was a local small business. We had done business with them for years, with only minor hiccups. However, everything subtly and slowly began to slip. Because it was a business in our area I began hearing rumors that the owner was having an affair. Then the rumors became fact as his wife found out and threw him out of the house. He continued with the girlfriend and moved in with her. It was no surprise with all this drama that their business operations got continually worse. Finally I ended up in his office to discuss our service problems. He shared with me his marital problems and how he was trying to bounce back.
It might seem a little harsh, but I figure if a guy’s wife can’t trust him, how can I? I explained this to him and put him on final notice that with one more mess-up we would be moving on to another supplier. No, I am not everyone’s bedroom police; I certainly don’t have time for that. Neither was I trying to punish him because I thought he was out of line, although I did. There is a simple rule here: a man who can’t be trusted isn’t worthy of trust, so I wasn’t going to base my business’s future on his delivering the goods. We try to compartmentalize a lot of things in our culture to make our rationalizations comfortable, but we do so at our own peril. I continued to do business with him and was criticized for doing so by friends who were apparently the bedroom police. Sadly, my theory was proven true as his once fine business deteriorated until we couldn’t use them. But we were not caught off guard and were ready because we recognize how important integrity at the top, and all through an essential vendor, is. “A good name is to be chosen rather than great riches, loving favor rather than silver and gold” (Proverbs 22:1).
You should outsource because a vendor has knowledge you don’t have, can do something you can’t do, or can do something cheaper than you can. When judging a vendor’s capacity you are determining not just if they can do the job but if they can do it at the volume you need and on the schedule you need.
A great price will not save you money if you have nothing to sell because your vendor didn’t get your product produced or delivered on time. You can save five cents a minute on your long-distance charges but that does you no good if the phones are down all the time because your vendor is lame. Capacity may be one of the most important considerations when choosing or keeping a vendor.
As your business grows you should know that you will likely outgrow your vendor’s capacity, and it is wise to monitor this so it doesn’t catch you off guard. When I first self-published the original Financial Peace books I had them printed by a local printer who was a friend of mine. He ran the pages from film made from laser-printed originals done in my living room. The cover was done by that same printer and he sent the finished pages with the covers to a local bindery, and voilà, we had a book. My first order was a thousand copies, my second order was four thousand copies, and then I ordered seven thousand copies. When I got ready to place my next order of seven thousand he called me to talk. It seemed my little book was getting big enough that it was overwhelming his capacity. He couldn’t get his other clients’ printing done because all he was doing was running my books. He suggested, rightly so, that I talk to some printing brokers, and since my volume was up I could cut my hard cost in half. I was so new at managing this kind of thing that I never saw that coming. Thank goodness he did. We are friends to this day and I’m glad our printing career started with him.
http://www.entreleadership.com/capacity
We had pushed the vendor beyond their capacity. Another rule of capacity is to learn your vendors’ lead times for production and plan your inventory and orders to fit their schedule. If you are a good customer or a big customer they can, and often will, change their production schedule and normal timeline to super-serve you. But if you do that on a regular basis eventually they will let you down. Learn their normal lead time and set your systems up to match, or change vendors, but don’t expect miracles on a regular basis, which is why they are called miracles—they don’t happen much.
Price should not be the primary reason to select a vendor. But all things being equal price can be the determining factor. You definitely want to negotiate and get the best deal when working with a vendor, but be aware that your essential vendor will go out of business selling to you at a loss. You want them to make money so you can grow together. Companies who bleed their vendors dry with no consideration of tomorrow usually don’t have a long and wonderful life themselves.
Understand we negotiate hard and are very good at getting the best price. But we are also aware that if they are losing twenty cents a watermelon they can’t make it up on volume. If you win too big your victory will be short-lived and you will be looking for another essential vendor.
When taking competitive bids and sharing information you should use the Golden Rule. Treat your vendor how you would want to be treated if you were bidding competitively. Would you want someone to show your competitor all your numbers and specs so your competitor could beat you this time and with other customers as well? I wouldn’t, so I don’t do that. We pull bids, and if there are two that are close, we tell them that they are one of the last two, so they should sharpen their pencils. At that point, without divulging who the other players are, we will tell them they have to hit a certain price to stay in the running. If I were bidding I would love knowing the range I had to be in to have a shot at winning the business.
When negotiating, use the power of cash. In most cases you are not literally going to pay your bill with cash on delivery, but if you simply clear your payables weekly or biweekly like I taught you in the accounting chapter it is as if you are paying cash. Paying very quickly is so unusual that we expect a further discount for doing that.
If your vendor begins to tell people in brochures or conversations that they do business with you, then they are getting an implied endorsement. In my world people pay for endorsements, so if they are going to mention to other potential customers that they do business with us, that is fine, but I will expect a discount for that service as well. That is a free endorsement, and so there should be some help in pricing.
When negotiating, share your vision for the future with your vendor. Remind them that if you make more money you will be growing your business and as a result they will get more business. Sometimes you can actually work out ways to have them partner with you by providing you some small services for free that will expand both your futures. Never allow your negotiating to be as simple as price per unit; there are always multiple variables.
Have a reputation in the market for being firm but fair with vendors. Sadly in our culture some companies have become specialists at getting their customers to accept low-or poor-quality goods or services. When dealing with a vendor an unacceptable answer to a quality problem is just that: unacceptable. Don’t be mean or tough or a bully, but don’t become a vendor pleaser either. As hard as we work at business we still find ourselves pressured to be a nice guy and accept substandard products or services. You can be kind and yet never be willing to accept a wrong answer.
I was having a conversation with a customer who wanted out of a contract early, which would damage our position in the marketplace by hundreds of thousands of dollars. The customer was emotional and declared that I was just unbelievably unreasonable, to which I calmly replied that I could live with being unbelievably unreasonable by holding them to an agreement that had no need to be broken, except for ego on their part. A long discussion ended with my being “unbelievably unreasonable.” An unacceptable answer is just that: unacceptable.
We order tens of millions of dollars’ of printing every year for our various departments from many different vendors. Printing is not hard to judge. It is either right or it is isn’t. There is a color chart and specs to it, so it either is or isn’t what was ordered, and yet we spend a lot of time in conversations with new vendors telling them we don’t accept substandard work. We help when we can, but if we put out junk it makes us look bad, so we don’t do it.
My radio show shares a glass wall with our front lobby so I can observe what is happening in our lobby while I am behind soundproof glass. Recently I watched the body language and hand motions of a conversation that was so clear it reminded me of a silent movie. An EntreLeader who has been with me for years had ordered a small run of a new printed product to test-market it. The color charting and specs on the product were very clear. The new vendor brought the small volume of product in and met my EntreLeader. I watched as my EntreLeader’s head cocked to one side while inspecting the product. He pulled out the color chart, prototype, and specs and began shaking his head. The vendor tensed up, stood up straighter, and began flapping his arms, gesturing more and more wildly. My EntreLeader smiled, nodded, listened, and then shook his head no again. The vendor became more agitated and the scene repeated. The scene finally ended with a red-faced vendor leaving with his substandard product. It was very interesting to watch all this happen, not hearing a single word and yet knowing exactly what had transpired. My team has learned these lessons well.
This chapter is very hands-on and mechanical. The EntreLeader understands that running a business successfully is very hands-on and mechanical. Sometimes the handling of areas of the business like contracts, vendors, and collections can make or break your success. Maybe these areas are not deal killers in your organization, but how you handle these operational functions reveals clearly who you are as a leader. Be intentional about the statement you are making to your team, your competitors, your customers, and the community through your actions in these areas. EntreLeaders are always considering the unintended consequences of how day-to-day activities are handled.
* Don’s quote refers to this study about Danish people: www.cbsnews.com/stories/2008/02/14/60minutes/main3833797.shtml.