Ready to hear how bad contracts can bring you down?
HOW OWNERS GET TRAPPED BY CONTRACTS
An owner called me, frantic, because a finance agreement was holding up the sale of his business.
“What do you mean?” I asked, but I had a pretty good idea. I had seen it plenty of times, with owners of both the unethical and uninformed ilk.
In this situation, the owner had signed an agreement for a piece of equipment with a finance term well beyond lending norms. Sounds good, right? Low payments spread out over many years?
The equipment was still on the books well after it had been depreciated. There were no further business or tax benefits.
In fact, at this point, the payments were a drain on the bottom line, and the prospective buyer knew it. Newer and better equipment could be obtained for half the cost. Having done their due diligence, the buyer wanted to exclude that equipment from the purchase of the business.
Despite having paid on the loan for many years, the unpaid principal was still subtantial because the payments, finance charges and fees were structured to benefit the financing company.
Furthermore, the owner could not refinance or pay off early without a very steep penalty.
No matter how he did the math, it made more sense to exclude the equipment from the sale, pay for warehouse space and insurance, and finish making the payments himself rather than paying to get out of the agreement.
WHY OWNERS MAKE BAD CHOICES
The fact is, some owners sign this type of contract willingly and knowingly. Why do they do it? Here are a few reasons:
- Owners, influenced by the sales manager, get stars in their eyes when they think of how they can undercut the competition on pricing while they pay a low monthly payment. They believe they can win, over time, on sales volume. Unfortunately, this rarely pencils out. Instead, they are merely robbing the company of future money and options.
- An unethical purchasing agent signs a contract or obligation for a kickback or personal benefit. Or, the agent may be following company guidelines in seeking low payments at all costs.
- The equipment salesperson is deliberately misleading about the total cost of ownership in order to score a bonus.
- Don’t forget the financing people. They earn a commission, too!
Beyond greed or naivete, some owners simply cannot flowchart the impact of their decisions. None of us likes to think we are that type of owner, but we all have strengths and weaknesses, and long range vision is not always a given.
What are the consequences of short-term vision when it comes to long-range planning? I think we all know owners who have sold their main business and moved unsellable equipment into a storefront or garage. Forced to run the equipment to cover the cost of the lease, these owners and their spouses live in purgatory, postponing the ideal life they envisioned for themselves after the sale of their business.
One owner told me he was terrified he would die before the lease term was complete, leaving the nightmare to his family.
A situation like this is net loss, financially and emotionally.
MAKING BETTER DECISIONS
Flash forward to our protagonist in his predicament.
“Where did I go wrong?” this owner asked me. “I thought I was making a good business deal when I bought that equipment.”
I’ll repeat what the owner said:
“I thought I was making a good business deal.”
Let’s start at the top.
1. This may sound basic, but it is the fundamental message in this story. Never sign a contract without reading and understanding it.
2. If a contract has serious financial impact (large amount and/or long repayment term), have your experts review it before you sign.
3. Read online reviews of the equipment vendor and the finance company.
4. Check the Better Business Bureau and the State Attorney General’s website for complaints or litigation.
5. Ask your trade association or peer group manager.
6. Talk to your local SBA (Small Business Administration) or SCORE chapter.
7. Hire a professional business coach to empower and educate you to make stronger business decisions.
Finally, understand that a finance company is not out to make a deal that benefits you. Like a casino, the finance company has created this game in its favor. It has analyzed and optimized every element. When it comes to financing, the odds favor the house, as in the gambling world.
IF SELLING YOUR BUSINESS IS ONTHE HORIZON
If a piece of equipment or contractual obligation is going to be undesirable in the sale of your company, it is better to find out before the business goes on the market.
We can try to work with a buyer to offset the burden. It may take more compromise and creativity than you had hoped, but it doesn’t necessarily have to affect the selling price, especially if the prospective buyer has an open mind and is motivated to buy.
Even if the buyer doesn’t make concessions, don’t walk away from a qualified buyer just because they don’t want to adopt your bad deal. You may have to take your bitter medicine so you can move on with life.
In conclusion, things aren’t always fair or tipped in your favor in the world of business. Owners have to keep their eyes open when it comes to business decisions and contracts, especially if the goal is to sell the business within the next few years.
In every business dealing and every piece of paper we put our name to, we must be well informed and well intentioned.
For 35 years, Rock LaManna has helped label and graphics company owners make better decisions. If you are ready to sell your business or improve your bottom line, integrity matters! Email Rock@RockLaManna.com for a confidential discussion about services available from the LaManna Alliance.