I suppose my idea of a good deal for everyone started a short time after I launched Paychex, or Paymaster, as it was originally named. Originally, I had no intention of providing payroll processing services outside of my hometown Rochester, but an ex-colleague, Phil Wehrheim, from EAS approached me and asked to partner with me; we struck a fifty-fifty partnership deal (without lawyers), and he opened offices servicing Buffalo, Syracuse, and Albany. Then Chuck Wollmer, the employee of a client, came to me wanting to get in on the action. I was happy to offer him a partnership, but he wanted a franchise. I’ll go into more detail about how we negotiated Paychex’s very first franchise deal later in this chapter, but that was how we started to grow into more than a small local business. Word got around and other people I knew well and trusted, like Bob Sebo, approached me asking to become a partner or buy a franchise.
Making it a good deal for everyone was at the heart of Paychex from the beginning. It was ingrained into the company’s corporate philosophy, it made sense, and it was important to me. Growing a national organization simply happened one territory at a time; by the time we consolidated into one company, there were seventeen of us, both partners and franchisees, and as I mentioned earlier, it felt more like a fraternity than a business. That climate could not have been achieved if each person hadn’t felt they were getting a good deal. Those who stuck with the company after it went public, or later left but held on to their stock, are now extremely wealthy, so without question they got the ultimate good deal.
I’ve always believed that if you can manage to negotiate a deal both sides feel good about, or at least think is reasonable under the circumstances, then it’s a win-win, and win-wins can lead to long-term relationships. I’ve never agreed with business gurus who treat business like war. Win at all costs seems to be their mantra, but “wins” like that are often short-lived. Any relationship built on someone having to be the loser can never be good for a business in the long run.
I’ve built my success on always trying to create a good deal for all concerned. That’s not to say I don’t want to get a good deal for myself—a higher discount, better terms—but if it’s not a satisfactory deal for the vendor, their ability to deliver may be affected, perhaps quality will suffer, or in a worst-case scenario, they will go out of business. If that seems extreme, think about the many reported cases of suppliers going out of business after being pressured into delivering large quantities of a product at unrealistic discounts by mega retailers.
My approach to negotiation is to figure out what the other person needs in terms of a number, or other options, and do my best to provide them with an offer that isn’t too far from what they are expecting. How do I do this? I’m a good listener and I do my homework. The more educated I am about their situation, the better position it puts me in to make a deal that benefits both them and me. Common ground is where the best deals are made, ones that stand the test of time. People walk away from one-sided deals and nobody wins. Good deals can be arrived at where the parties are equally happy, or even equally unhappy.
In business there can be many winners in any industry, and that’s a good thing; read my views on competition in chapter 5. This is contrary to politics, where you run against another candidate and you either win or lose. During my stint as a politician, when I ran for governor of New York three times, I met many unprincipled and corrupt politicians for whom winning was the only goal, rather than serving the constituency they were supposed to be representing and by whom they were elected. Some of them lost elections, others lost grace, and a few ended up in prison. I am glad to report that after fifty-plus years in business, it’s my experience that any time you can get a good deal for everyone, it will turn out to be good for your business and increase your chances of long-term success.
“Win at all costs” people are tempted to do things that are over the top, illegal, immoral, or unethical. You don’t have to do that in business. But that’s not to say businesspeople don’t act that way. You always need to be on your guard for the unscrupulous.
Negotiation is far easier when everyone is on the same side, even though they will still be negotiating for the best deal they can achieve. My “good deal for everyone” philosophy extends to my personal life. Horror stories of wealthy people suffering financially during a divorce are legendary. It’s often said that the only winners in a divorce are the lawyers. Well, I’ve been divorced three times. Twice I paid both sides of the legal fees, and for my third divorce I paid my side of the legal fees. My last divorce was in 2007, so what I’m about to tell you is not ancient history in terms of cost. The total I paid in legal fees for all three divorces combined was less than $6,000. Why? Because I sat down with each of my wives and worked out a reasonable settlement before the lawyers became involved and started playing us against each other and turning everything into a crusade.
I firmly believe that in almost all cases it is possible to find common ground and work out a deal where both parties get most or all of what they want. The worst-case scenario, if you approach everything fairly, is a deal that both parties are equally unhappy with, but they can accept.
I remember when my first wife, Gloria, and I sat down to discuss our separation and divorce at the kitchen table. I told her I had a liquidity issue, that coming up with a cash settlement would be difficult. She in turn said that what she wanted was for me to give her the New York City Paychex franchise, which at the time was one of the few I hadn’t sold. In addition, she wanted me to train her to run it and provide her financial assistance until it broke even. My first consideration was whether I thought she could handle the franchise, but I knew she had great social skills and would be excellent at bringing in business. Although I knew the computer room would scare the life out of her, I knew we could help her with that aspect of the business.
After some consideration I came to the conclusion that this deal could be good for both of us. As it turned out, she was a great franchisee and made a success of the business, so much so that after the consolidation she ended up owning 5 percent of Paychex. If she still held those stocks today, they would be worth more than $1 billion—now I’d say that was a good deal, wouldn’t you?
There is a saying, “Never negotiate from an ultimatum,” and in principle I agree with it. If you are trying to buy a car and you tell the salesperson that you are only willing to pay a certain amount or you will walk, then you had better be prepared to walk. In reality, however, you may be closer to a deal than you think. If you are both willing to give a little, a good deal could be achieved by both parties.
But let me tell you the story of when I broke the rule and it worked. It was when I took Paychex from being a bunch of partners and franchisees and turned it into a corporation. We all met in Nassau to discuss consolidating into a single company. It posed a significant challenge: in addition to me, there were sixteen partners and franchisees who had a stake in Paychex. If I wanted them all to agree on consolidation, each and every one had to believe they were getting a fair deal. The big question was, how would I decide who got what percentage of the new company?
There was simply no way I could have negotiated a deal with sixteen partners and franchisees with big egos who possessed a skewed view of their actual worth. It would have been a moving target; as soon as I made a deal with one person, I knew details would get back to someone whom I’d already reached a deal with and then that person would want to renegotiate.
My only chance was to create an acceptable no-negotiation situation. Prior to the meeting I sat down with Bob Beegen, my partner in Detroit, and Philip Wehrheim, my partner in upstate New York, and we made a list of everyone’s territories. Against each, we noted what they had accomplished to date and assessed their future potential. Based on this initial information, we noted what we felt each person should receive by way of shares compared to the others. This first step was crucial because it gave us a base from which to adjust for factors outside the primary formula.
The most important thing I decided was that I would not negotiate with anyone. With the help of Bob and Phil, I thrashed out a good deal for all parties the best we could by taking into consideration the size of each territory, how well the territory had been managed, and its profitability. The formula we used was complex and interconnected; changing one individual’s share of the new company would require us to reassess everyone else’s. The ripple effect was unthinkable. I also knew the minute we started negotiating with one of the sixteen, we would end up having to negotiate with them all—and that wasn’t going to happen.
I handed out the offers, and the next day we gathered around a boardroom table in a private room at the hotel. I opened with, “This is it, this is the deal—we’re not changing it. If you don’t want to join us, that’s okay. We’ll protect your city and we won’t go into your territory. No hard feelings.”
I went to each person in turn and asked them whether they wanted in or out. By the time I finished, every single person had agreed to accept the package and join the new Paychex corporation.
To reemphasize what a good deal it was, if every owner still owned the share of the company they were given that day, the one who received the lowest number of shares would now own shares in Paychex worth $250 million.
I always attempted to create win-win situations when doing any deal, but especially in major negotiations. Such was the case in 2002, when Paychex acquired Advantage Payroll Services Inc., based in Chicago, for $240 million in cash. This was a significant acquisition.
What was more interesting than the acquisition itself was the way it happened. I was at an investment conference in Chicago and knew the company was owned by a venture capital company that wanted to take them public. While in Chicago, I called the general partner of the firm and asked if I could meet with him. As soon as we started to discuss a potential purchase, I realized his company didn’t want the hassle or cost of going public. Venture capital firms often want to realize a quick return on their investment.
From my perspective, I had to figure out whether I could afford to make the purchase and whether that amount was worth spending to take out a competitor with forty branches that was growing faster than we were. The answer, of course, was yes. I calculated the approximate cost involved in taking the company public, took into consideration the current value of the company and also its potential value after going public, and came up with what I thought was a genuinely good offer. Within forty-five minutes I’d made him an offer and he accepted.
The key to good negotiating is to do your homework and know, before you start talking, what the other person is likely to consider a good price. You also have to know what price you feel represents a good deal for your company.
There have been complete books written about the art of negotiating, but when you strip away the smoke and mirrors, it’s simply about finding that sweet spot where both parties feel they can sleep content. Anything else is fool’s gold.
Now, you may be thinking that it can’t be as simple as that, and you’d be correct. The basic agreement can be reached quickly with the method I’ve described above, but then accountants and lawyers have to carry out their due diligence and pull together the paperwork. Just don’t bring the lawyers in too soon. Negotiating only becomes complicated if you let it or if you let people being paid by the hour become involved.
In business, there are a lot of people whose services you may have to retain from time to time. There are lawyers, accountants, advertising agencies, PR agencies, manufacturers, suppliers, contractors . . . The list goes on. Let’s call them vendors. While I admit most businesses need to use these vendors, they can become one of the biggest drains on your operating budget, especially those who charge by the hour. I particularly dislike those.
As an example, let’s look at lawyers. Lawyers in particular are exceptionally costly, and their fees have a habit of escalating in a most alarming fashion unless you are watching them carefully. I once had a legal firm work for me over maybe two or three months, but they failed to send us a bill until fifteen months later. The amount escalated to an insane amount, and I had no way of monitoring their hours or productivity.
You have no idea whether they are overcharging you or doing unnecessary work. One thing you need to watch out for is their habit of charging you $200–$250 an hour for a junior associate earning $30 an hour. And don’t get me started on the use of boilerplate or templated documents that are charged out as though they were created from scratch.
When you use any professional firm, make sure you really need them, because sometimes they can actually get in the way. While negotiating my very first franchise agreement in the early days of Paychex, my new franchisee and I sat in my conference room with our respective lawyers. After a few hours I came to the realization that the only people arguing were the lawyers. I asked them to leave, and my new franchisee and I struck a deal in ten minutes. We shook hands, walked out, and told the lawyers to simply handle the paperwork. It wasn’t the first or the last time I metaphorically, or even literally, threw a lawyer out of my office.
Working with advertising agencies, PR firms, and just about any other company that bills by the hour is hazardous to your bottom line. Parameters need to be set. When dealing with any such vendor, my advice is to insist on monthly detailed billing. You have to build a relationship that works in both your favor and theirs.
As I stated earlier, one of my favorite negotiation tools is the pregnant pause. I’ve used it when interviewing staff, buying cars, even when trying to decide on which movie to watch. In fact, I employ this simple technique regularly across a wide range of situations. In essence, it’s a well-placed pause, or period of silence, which encourages someone to agree with what you have just said or suggested. It’s effective in closing sales deals, but also in getting people to tell you more than they might otherwise be willing to share. Police officers and detectives are adept at using the pregnant pause.
I’ve used it countless times, but on one occasion it was particularly effective. About a year after I purchased the Buffalo Sabres hockey franchise, a major mistake was made by a senior manager that cost me a great deal of money.
Toward the end of our first season I learned about contract addendums. Prior to the then-current collective bargaining agreement in the NHL, there were standard player contracts, but almost every player had an addendum that modified the standard part of the contract. This meant that when you traded for a player, you had to study the addendum to discover what you were buying into.
For example, a player might have had written into their agreement that they would receive a bonus if they scored twenty goals during the season. If upon being traded midseason the player had scored nineteen goals, the two teams would stipulate during the trade conference that the old team would pay 19/20ths of the bonus. Today riders are not allowed on contracts, but back then it could be a major issue.
Unbeknownst to me, in my first year with the Sabres, we had traded for a player who had a rider, or addendum, on his contract. He was a young player and not playing well. Our negotiating team had not read the contract thoroughly, or at least not the rider, which stated he was entitled to an additional $250,000 if he played in a specified number of games. When we bought him, he had just two games left before qualifying for this bonus. It wasn’t until after the season ended that it came to our CEO, Larry Quinn’s, attention that we owed this player a quarter million dollars.
At the end of the season I invited Larry Quinn, Dan DiPofi, our chief operating officer, and Darcy Regier, the general manager, down to my Florida home for a meeting to review and discuss our performance. Initially it was just the senior management team, as Darcy wasn’t due to arrive until the following day. We had a very productive day. After a long discussion and analysis, we developed and agreed on a plan to drastically reduce season ticket prices and to introduce the concept of variable pricing for individual game tickets. Satisfied with our efforts, I suggested we go watch the playoffs at a local restaurant.
That evening at dinner Dan informed me about the situation with the bonus. Larry had told him to hold off until breakfast the following day, but it had been eating away at Dan all day, so when he got me alone at the bar, he spilled the beans. I stormed up to Larry and said, “When were you going to tell me about this?” Larry replied that he was hoping we could have a nice dinner and deal with it the next day. I asked him what the heck we were going to do about it, and he pleaded, “Before you get upset, let’s talk about it tomorrow morning after we’ve spent some time talking with Darcy about the team.”
The next morning, we gathered in my small sunroom, and after the normal greetings and pleasantries, I immediately opened with, “So, do we owe a games-played bonus for this player?” I sat there, and they all looked at each other and no one answered until Darcy said, “Yes.” I asked how much of it San Jose would cover, since he came from that team. Darcy answered, “None of it.” I then asked him who had reviewed the rider and got no answer. In fact, no one said a word. Four adults sat around a small table in a resplendently bright and cheery sun-drenched room in excruciatingly uncomfortable silence—at least for three of them.
I let the silence hang, and hang. I watched Larry, Dan, and Darcy squirm, as if they were all about to melt into pools of steaming liquid on the tile floor; especially Darcy, whose department had ultimate responsibility for contracts. Still I said nothing—for a full forty-five minutes—and neither did anyone else.
Eventually Larry could stand it no more. He got up to walk out onto the patio and crashed right into the glass doors, smashing his head, bouncing off, and falling to the floor. Jumping to his feet but now sporting a large bump on his head, he reached for his water and still the silence continued. Sometime later Darcy finally spoke up and said, “Tom, do you want me to reimburse you for the loss?” I thought for a moment or two and then responded, “That won’t be necessary. Let’s move on.” And we went on with our business as normal.
The long silence, or pregnant pause, is something I have used extensively in business and is one of the most effective tools in an entrepreneur’s arsenal when used correctly. In this case I used it to remind my team to respect my money, respect my investment, and not be cavalier or careless with our resources. I expect the same from any company in which I invest and any charity to which I donate money and time.
People often ask me how to deal with someone who is employing the pregnant pause, so I’ll share it with you: you have to have the strength of character to outlast them. It’s not easy to sit in silence; it’s in our nature to fill the void. But if you don’t and someone else does, you can learn a lot of useful information. But never try to outlast me—seriously.
Try practicing the pregnant pause in personal circumstances, perhaps when you have stated your preference of restaurant to go to for dinner or what movie you’d like to watch. Let the silence hang, and more often than not, you will get the outcome you desire.
Another time it can be employed is after asking a question to which you already know the answer or when you know the answer you wish to hear. I used to get accused of this constantly at Paychex. It is a great way of seeing whether people are being honest and consistent. It also offers you an opportunity to get differing opinions. On occasion I have been known to change my mind after asking such a question, but again, only on occasion.
Another negotiation or interview technique I frequently use is to ask very direct questions. People think I do this to make them feel uncomfortable, but they are legitimate questions; I just ask them in a very direct way.
Two interview questions I often used are, “How much money do you make at your current position?” and “If we ask you to relocate, will your spouse support the move?”
When I’m looking to acquire or invest in a business, I ask things like, “What’s the biggest concern you have about your business?” or “How much of your own money have you put into the business?” Further along in negotiations I might ask, “If we go ahead and proceed to acquire your company, we would like you to continue working for three to five years. Are you willing to do that?”
One question I’ve asked on several occasions when mentoring the owner of a company I am investing in is, “Do you really think your son-in-law [or niece or whoever] is the best person to be marketing director of the company?”
Questions like these are meant to put someone on the spot so they are forced to make a decision or perhaps provide information they might otherwise prefer not to disclose. They also force the person to deal with reality and come to terms with situations they might otherwise avoid facing.
Previously we talked about the pregnant pause and its effectiveness. A word of warning: do not employ it if you are asked a direct question. Direct questions require immediate answers; hesitating can imply a reluctance to answer the question. This will lead to suspicion as to the accuracy and honesty of your eventual reply.
I’ve always tried to win graciously and disagree with those who feel the need to rub salt into the wounds of people they have beaten in the game of business. There is zero upside to that behavior. You win some and you lose some; you make good decisions and you unfortunately from time to time make poor decisions. The art of being successful in business is to make more of the former and fewer of the latter.
Here is an example of someone who did not lose graciously. In 1981, ADP (Automatic Data Processing) showed interest in buying Paychex. They seemed serious, so I went to Roseland, New Jersey, to meet with two senior VPs and an acquisitions manager. They offered $20 million, but there was a caveat: the purchase contract was based on an earnout over a three-year period. This meant Paychex would have to meet certain goals before receiving the total amount; in other words, responsibility without authority. When I told the acquisitions manager that there was no way I was going to take that deal, he slammed his fist on the table and said, “You’re going to be forever sorry.” I calmly replied, “We’ll see what happens.” That’s another way to close down negotiations quickly.
I had no appetite to go back and reopen any discussions with ADP, especially with that individual. Paychex grew to be worth more than one thousand times what they were offering back then, so I didn’t and don’t feel at all sorry. But to this day I still treat ADP with the respect they deserve—that’s winning graciously.
My philosophy of making things a good deal for everyone goes back to my early days as an entrepreneur and includes everyone from business partners and employees to customers and vendors. Outside of business deals this also involves having fun with people, while at the same time holding people responsible for their actions.
Business should have a fun side, and I am known for the pranks and practical jokes I play on the people I care about, and the pranks people have played on me from time to time. In chapter 6, I shared several humorous stories relating to the training we carried out at Paychex, but now let me tell you about a few times when fun and business came together in perfect harmony.
Once a month we had an officers’ meeting. I remember on one occasion there were about twelve senior managers in the room, and we were talking about how many clients we were gaining compared to our attrition rate. One zone manager announced seriously, “We’ve got to sell more than we lose,” as if this were a pearl of profound wisdom. I said, “Well, that’s a revelation.”
Forever after, we’d start each meeting with managers reading their “revelations,” and I was never short of ones to choose from, including a wonderful example from our chief financial officer who stated, after I asked him to tell me our current cash position, “Somewhere between four hundred and eight hundred million dollars.” That statement came back to haunt him for many years, as did these sage statements from other senior managers: “You’ve got to hire good people” and one of my favorites, “To have more clients, we have to sell more clients.” It may have been fun, but it also made people think before uttering what they considered to be a thoughtful insight.
Although I like to have fun for fun’s sake, I have also throughout my business life used it as a means to issue a life lesson to those I felt were in need of a kick up the proverbial backside.
Senior management occupied the fourth floor at Paychex’s corporate office, and we had a tradition of celebrating birthdays with cake and ice cream on the Friday closest to someone’s birthday. Gene Polisseni, who was head of HR, started this tradition, and I supported it as a good morale booster. They were fairly innocuous events, unless it was your first birthday with the company, in which case you were expected to wear a party hat complete with a rubber band to hold it in place. I didn’t start this particular mild form of hazing, but I did enforce it because, well, it was hilarious.
Shortly before Marty Mucci took over as CEO, he celebrated his birthday and the time came for him to don the hat. He refused and was duly jeered by all present. He eventually picked up the hat, touched it to his head, and threw it back down on the table and said, “Okay, I wore the hat!” I didn’t say a word—not then, anyway.
At the next officers’ meeting I brought up for discussion the color of our checks, which had always been Paychex blue, our corporate color. A conversation ensued, and I could see Marty was unhappy with the topic and wanted to say something. Now, one of my golden and intractable rules in meetings is that only one person is allowed to talk at a time, but when Marty launched into why he thought changing the color of the checks was ridiculous, everyone else in the room started talking to each other and ignored him completely.
Much to Marty’s astonishment, I let it continue for a short while and then said, “Okay, let’s move on.” At which point Marty started to remake his point: “I think it’s foolish . . .” and everyone started talking again. When this happened for a third time, Marty, who was beside himself, said, “Can anybody hear me in this room?” The room went completely silent. I quietly turned to Marty and said, “Next time you’ll wear the f—ing hat.”
That’s not the end of the story. When I retired Marty sent me a card, and inside the envelope was a crumpled party hat. I never acknowledged receiving it, but sometime later when I was visiting Paychex I went into his office and left the hat on his chair. Nothing was ever said.
There was never mean intent in the pranks, even when I nearly destroyed my best friend’s car. Gene Polisseni drove a Mercedes-Benz SL sports car all winter long in Rochester, New York, and that was quite unusual at thetime. One day when I drove into work I saw a large crane that was starting construction on the addition of our new corporate offices. It gave me an idea, and I asked the contractor to build a platform large enough to hold a car. Then one day we sent Gene out to lunch for a business meeting and got his spare set of car keys from his wife.
When he returned to the office, his bright-red Mercedes was five stories above our building. It was windy, and the car was swinging back and forth, and I thought, Jeez, this might become a $75,000 joke if it hits the pavement. Gene, however, was unflappable; all he said was, “Boy, I wish I’d thought of that.” People talked about it for years, especially regulars at the restaurant across the street who couldn’t believe their eyes.
Business doesn’t have to be deadly serious all the time; you are allowed to have some fun. My no-nonsense approach more often than not looks for humor that contains a message or a test, be it of character, personality, or intelligence.