Your Biggest Asset and Liability

In last week’s episode of Dragons’ Den, one pitch went sour for the simple reason that the biggest asset in the business was also its biggest liability. This is a fairly common problem in family-run businesses, often a function of one member of the family remaining in control of a business even when it has grown far beyond their ability to manage it.

In this particular case, Kim and Paul Nolet were unlikely prepared for the reception their business would receive on the show. Their product, an electric scooter with some pizazz, was driven out of the den for the simple reason that the creator of the scooter was not a savvy businessman, yet would not relinquish control of his company to make it profitable.

Paul Nolet manufactured the scooters in his garage, and would sell them for a price competitive with wheelchairs. With his margins so small, Kevin O’Leary suggested he raise his prices to about $6,000 a unit, which would provide a healthy margin to make the business viable. Paul’s response was admirable, but businesses are not built that way:

I prefer to make my living the honest way.

It’s very noble to not fleece your customers when you have a product they clearly want, and would pay any price for. However, there is still the issue of charging fair rates for the products, and Paul’s price fell far short.

Kim Nolet, who appeared to be more business savvy, was asked what the biggest problem her business had. She seemed amused when the Dragons informed her that Paul was the biggest liability, but they weren’t joking. With every decision needing to be cleared through Paul, there was a limitation on the ability for the business to grow. Paul was set in his ways, and had his opinions as to how the business should operate, and appeared reluctant to move from his position.

This is not a surprising issue. Perhaps one of the more difficult tasks investors face when working with a new business is in determining which portions of the existing management can bring the business to the next level, and which portions need to be trimmed and removed. The biggest obstacle is often the egos involved – people who have put incredible amounts of effort into growing the business don’t like to be told that they are no longer needed.

In various articles I’ve written about succession planning, this is one scenario I didn’t discuss, though it is relevant and perhaps one way succession happens that people partially plan for. How will the business transition under the new owners, and how will the current management team evolve to a new team?

If your business is prepared, this transition can be smooth, making such opportunities a dream to execute. Unprepared, though, and even the best of businesses can fail for the sole reason of lack of foresight.

The Expensive Route to Certification

When my wife certified as a Fitness Instructor, she entered a B2B2C market focused on education, with a price. The first certification allowed her to teach fitness classes, though it turned out that most fitness centers look for instructors who are also personal trainers, a certification of its own. Certifying as a Personal Trainer was an expensive course, though perhaps based on typical hourly rates in our area, it’s a reasonable investment.

However, part of the certification is a requirement to take further courses, or to attend conferences and seminars. Of course, everything in this case costs more, though some may see it as the cost of retaining currency. However, in addition to the mandatory learning dictated by the certifying body, many of the classes being run in fitness centers require additional certification, from Yoga (which requires years of practice and training) to Resist-a-ball (which has 2 half-day courses to be certified).

Fortunately, the continuing education requirements are designed such that most of these additional courses count as credit toward those requirements. However, when you do the math, it turns out that being certified and being a desired employee are two different things.

To be certified, the cost totals about $1,000 plus the annual membership fee. However, each course runs from a hundred to thousands of dollars. Over the course of an instructor/trainer’s career, the costs of remaining current can be in excess of $1,000 per year. When compared to a university or college degree, it seems to be quite steep. This is further exacerbated by the fact that many people with these certifications will be contract workers, where the cost of maintaining their certification is a noticeable percentage of their annual earnings.

Yet the certification remains incredibly popular, and attendance at the annual conference in Toronto bears this out. Why this is so is interesting – what is the motivating factor for people to pursue a career which, if done part-time as many such people work, will be marginally profitable?

I stumbled upon what might be the answer in a discussion with another member of the family about career options, and this came up. He wasn’t interested in becoming a trainer because of the money, but rather, because he liked to work out. Certified, he could look for a part-time job at a gym in the area (which typically includes a gym membership as part of the compensation) and get a regular work-out. No longer would he be paying to work out, instead, he would be paid to do something he likes.

This is perhaps what is so compelling about this career – people who go into it tend to enjoy their work, and the money is not the point. Though they may not make much money doing it (though some people do quite well if they can find a niche and fill it), they are unlikely to lose money at it. The enjoyment they find in the work itself is the motivating factor.

When looking at work, think about whether the motivating factor is the paycheck at the end of the week, or something else. If you want to be the most successful you can be at your work, find a job where you enjoy the work, and the paycheck is a nice bonus (or, alternatively, is what allows you to spend time doing whatever it is you’re “working” on).

Living the Life

I set foot inside the Apple store for perhaps my first time earlier this week, and was quite impressed by the entire experience. While I am not a committed user of their products in general, I still found the trip into the store to be quite memorable.

The store was unlike many other technology stores i had been to – the devices were out to be used by customers, and every available device seemed to be in use. The store was crowded, though one staff member commented that this was actually quite empty. For a store their size (maybe 500 square feet in view) I would think having several dozen customers inside there would be impressive.

Additionally, everyone seemed to be enjoying themselves. People were looking at the merchandise, chatting away, and as far as I could discern there were no complaining customers. – at least, not loudly.

The staff was incredibly friendly. They were easy to identify, wearing large name tags and bright red uniforms (was that special for the season?) and there always seemed to be a couple available to help. In fact, I was astounded by the number of staff I could see in the store – at one point, I was able to see at least 8 people working, and there were probably a few I couldn’t see.

When it came time for me to make a purchase, I was assisted by someone knowledgeable about the products and who could help me choose between several options. Then, rather than wait in line to check out like I expected, she pulled out what looked like a souped-up iPhone and processed my order at one of the tables in the store, printing out my receipt and handling my credit card from her device.

Overall, this is a store that really understands it’s audience. If you want to come in and hang out, they’re ready for you. If you want to run in after work and make a quick pick-up they will get you processed quickly, without making you feel like they want to get rid of you.

Retail stores can learn a lot about how to handle customers by just watching what happens in the Apple store, and following suit. Make sure your staff know the products you sell, are equipped to deal with all types of customers, and are there in sufficient force to avoid long lines and wait times.

And don’t forget, make your [potential] customers want to come hang out in your store.

Twitter Strikes Again

I recently purchased a new computer from a certain manufacturer with whom I’ve done business many times before. I was purchasing a laptop they had advertised in a catalog, and the price I ultimately paid was $50 less than I had expected based on the price advertised, and included a [nice] carrying case. I immediately posted to Twitter a comment about the nice deal I had gotten:

Satisfied with purchase

A day later, I checked the delivery estimation for the system, and discovered that the estimated date of delivery was a month later. While I understood that the delivery estimation was exactly that, it bothered me that a completely standard item would take so long to reach the consumer, and I vented:

Venting about delays

My carrying case arrived, but still no laptop, and no change in the estimated date of delivery. Following a phone call to customer care, I was told that they were backlogged with orders for that particular system, and that there was nothing to do but wait. While their support was pleasant, they did not actually solve my problem, and I vented yet again on Twitter, this time naming the company:

Naming the culprit

Finally, my computer shipped, though there was still no change in the estimated delivery date. This implied that Dell fully expected the delivery company to require 3 weeks to ship something from Mississauga to North York, something patently false. Amused, I posted once again to Twitter, this time as a joke:

Joking about estimations

What I didn’t expect was to get a response, seeing as I had not been contacted the entire time I was complaining about Dell. However, to my surprise, I was contacted by someone from Purolator, the company named as the shipping company being used for deliveries from Dell:

Purolator responds

I responded to Jeremie, if only to see whether or not there was a person behind the post, or if this was another automated responder that saw I had mentioned Purolator:

Checking the account

Minutes later, I got a response, indicating that it was, in all probability, a real person managing the account:

Purolator offers to help

I was intrigued that despite knowing my issue was not with Purolator per se, but rather with the manufacturer, they still offered to make sure that my delivery was made promptly. While the manufacturer was ignoring me, Purolator wanted me to know that they would ensure that they would do their best to create a happy ending.

In case you’re wondering, Dell is quite active on Twitter. A quick search reveals about 20 accounts, most of which are being used to market their products. A few are devoted to other interests, such as following members of the Dell team. There’s an account claiming to belong to Michael Dell (though I would be surprised if it was actually him). But they aren’t listening and responding to the complaints.

Contrast that with Purolator – I had no idea if they were on Twitter, I named them once in conjunction with a complaint about a different company, and they responded anyhow. Once I clarified that I had no issue with Purolator, I did not expect to hear that they would check the order for me – there was no need for them to do that, but they reached out anyways.

Perhaps this was because they realized that I could and would vent about poor customer service, but I think it goes beyond that – they actually care. They want to make sure that the end of every customer’s experience is a happy one, and they’ll reach out in order to be able to do that.

Purolator figured out what Twitter is all about. Dell? They’re still in the world of paper, radio, and TV.

Working for Equity Doesn’t Always Work

Working in IT, a common occurrence is to hear about projects being run by a group of people who believe in the product, and are essentially donating their time. Money is generally budgeted in such projects toward difficult-to-avoid expenses, such as incorporation fees, or for services which they cannot get donated.

However, occasionally a skill will be needed for which some serious cash will have to be paid out. As an example, a business might require an e-Commerce site set up, from which they can sell their product. They can try to create something on their own, but unless someone on their team has the needed knowledge, it will cost them a few thousand dollars to get this set up properly.

A choice must be made at this juncture – do they sink the entire budget into the site, risking that if the development is sub-par, the money may well be wasted, or do they consider offering equity or promise of future revenues in exchange for work done now?

From my experience, both choices are dangerous – the first because there is usually no insurance policy against the worst-case scenario, and the second because it is difficult to find people willing to work on such promises.

What motivates YOU to work on a project is not likely to motivate someone else to work on that same project. If you’re inspired by the idea of working on a particular product, you may be happy to do so for little or no compensation. But your pet project is not someone else’s, and they don’t have the same belief in the project that you have. They have no reason to trust in the success (including the fact that you’re putting everything you’ve got into it).

They’re going to be motivated by being paid, in general. They don’t want a piece of your business, or a promise to pay. They want cash. While on a successful project it might have been better to accept equity, other businesses don’t manage their risk of being unable to meet payroll by relying on the risks of other businesses being profitable.

While it’s fantastic if you can assemble an entire team of motivated individuals, each of whom is willing to work in exchange for a piece of the pie, once that team is assembled, extending it usually proves difficult.

If you find yourself in such a situation, then the question you should be asking potential service providers is not whether or not they can reduce their price for a particular product, but whether or not they can find a cheaper product that would meet your needs for the short-term. If you can’t afford the $5,000 full solution, maybe there’s a different $1,000 solution that will work until you can afford more.

Just don’t expect to get the bargain, instead, see if you can get a more appropriate solution for your budget.

A Time for Action

Usually, this article would be dedicated to a particular pitch from the previous week’s episode of Dragons’ Den, but today, it’s focused on a piece of advice issued on the den. With a business trying to move forward rapidly before they had a sufficiently strong business model, Arlene Dickinson of Venture Communications made an interesting observation.

Entrepreneurs often think that if they don’t act quickly, the opportunity will disappear. And there’s never been anything more false than that.

The initial reaction to this is that Arlene may have erred in her statement – after all, opportunities come and go, and rapid action is often needed to take advantage of a given opportunity. Reflection, however, shows that Arlene’s years of experience are coming into play as she highlights one of the critical issues with an entrepreneur’s mentality.

It is true that opportunities come and go, and that action is required if you are to take advantage of such an opportunity. However, even when action is required, it should never be done on the basis of it leaving, but rather, because the opportunity is a good one. That is, the action should be taken because after careful evaluation (which is not necessarily a slow process), it was determined that the benefits of the opportunity are worth pursuing, and you are capable of succeeding with it.

As an example, a person who manufactures custom jewelery may have the opportunity to get featured in an internationally read magazine. This would have the potential to seriously increase her exposure, and then sales. However, reflection would show that since she crafts each order herself, the realistic limit on the number of orders she could fulfill is much smaller than what that exposure would provide. As such, the exposure would have some short-term benefits, but until the infrastructure is in place to handle a major increase in volume (for example, using some junior designers to produce the work once it has been designed, with a hiring structure that is easily scaled), the opportunity would actually be bad for the business.

This has happened to many businesses, where they over-extended themselves, and then found themselves unable to meet demand. The action that precipitated the situation was often one of lost opportunity – or rather, a refusal to acknowledge that some opportunities should not be acted upon. If a business wishes to be successful, they need to learn to reflect and to act on careful evaluation relative to the amount of risk the opportunity can create.

And yes, sometimes you will have to act, and sometimes you will have to make decisions quickly. But the decisions should be based on logical evaluations, not emotion.

The Best Location For Your Business

A common question when starting a business is in regard to choosing a jurisdiction under which to operate. For example, here in Canada you can incorporate provincially or federally. In the US, you can incorporate in any of the states, provided you meet their requirements. Other countries will allow you to form a corporation under their auspices, which may have various benefits to you and your business.

To decide the answer as to which jurisdiction is best for your business, you need to think about the basic reasons why you incorporate to begin with. First, it offers you as a private person protection from the liabilities of the corporation (with a few exceptions). Second, it offers you options for taxation purposes. Third, it gives you a vehicle under which to operate your business, raise capital, etc.

The first benefit is pretty much standard fare for a corporation, and so is basically irrelevant to this discussion.

The second would require some serious consultation with your accountant and lawyer, who could work out the most beneficial way to organize your business.

The third would imply that you look at what you intend to do with your business, and what requirements might ensue from that activity.

For example, if your entire business is operating in Toronto, with no business activity outside Ontario, you would be unlikely to have any reason to incorporate anywhere other than Ontario (except for possibly incorporating federally instead). If you will need to borrow money, you should look at what requirements banks and similar institutions have in regard to whom they will lend money to, and at what terms.

The simplest rule of thumb, though, is to incorporate in the same place that your business operates. If you don’t operate in the Cayman Islands, than why are you putting your corporation there? An audit of your finances might reveal this holding, and could result in penalties if you’re caught doing something like this, under the premise of tax avoidance. If you think that isn’t likely, both Canada and the US have recently been catching people with exactly this type of arrangement, and the fines have been incredibly steep, far beyond any potential savings the arrangment might have provided.

Finding Ideas for Business

One question that comes up time and time again is how businesses find ideas – whether it be for a product, a service, or anything really that they can get people to pay for. The answer to this question, perhaps, could be an entire business on its own.

However, there are a few different ways that people use to locate and refine business ideas, and they are worth discussing.

The first is what is usually called scratching an itch. That is, you have a problem which you face on a regular basis, and find a solution to it. You then try to see if there is, perhaps, a market for that solution, and build a business around it, if there is. If your solution is truly unique, and the problem sufficiently common, then this has the potential to create an entire market on its own.

The next option is to look at an existing product or process, and refine it. That is, your product is based on improving something which already exists. The upside is that you are well aware of who uses the product, and perhaps, how to market to them. The downside is that you will need to steal customers from other vendors, which can be extremely difficult for the new player to do.

Alternatively, you can build a business by bundling other services or products together in a unique combination. This is one of the strategies suggested by the book Blue Ocean Strategy which worked for Cirque du Soleil, as an example, combining the circus with other forms of theatre entertainment. While perhaps riskier than entering well-defined markets, the rewards can also be greater. Additionally, much of what will build such a business already exists, and the innovation is in how it is presented and delivered.

There may be other ways of coming up with ideas, but these strategies should provide some measure of relief in that they show the groundwork for ideas is right around you, if you know how to open your eyes to the opportunities.