Big Wide Ocean: Strategies For Worry Free Business
Author: ApproachableLawyer

Chapter 2
SHARK-PROOF YOUR BUSINESS

Chapter 2: SHARK-PROOF YOUR BUSINESS

 

The business world is full of sharks.

Given a choice, would you swim in shark infested waters with or without some form of protection?  If you are making the leap to go into business then you must be prepared to encounter business sharks.  No matter how hard you try you cannot avoid them in the business world.  So, armed with this knowledge and a desire to make your business successful, what do you do?  Essentially there are two simple steps. 

First learn to recognise the sharks.  They come in all shapes and sizes, and are very skilled at hiding their true character.  However, there are telltale signs which you must learn to recognise so you don’t get caught in the shark’s trap. 

Second, you need to have strategies in place in your business for making sure that the sharks do not eat your profits or, worse still, destroy your business. In the sea world, your protection from sharks could range from a harpoon gun to a state of the art shark cage.  In business, there are things you can do to protect yourselves from the business sharks and this book tells you how to build a robust shark cage for your business. So in short, shark-proofing your business is about these two things:  recognising the sharks in business, putting in place strategies for protecting your business from them and, if necessary, fighting them off.  This chapter will look at the concept of shark-proofing in a lot more detail.  Specifically:

1.    What is shark-proofing and why is it so important?

2.    How to spot the sharks in business; and

3.    Three strategies to shark-proof your business.

 

Why many businesses fail

Many first time business owners go into business naïve as to the sharks in the business ocean.  That is not to say that they don’t know they are there, but they perceive that they will never bump into one.  That is a false and very dangerous perception, but one which sharks prey on all the time.  They are trained through experience to recognise the naïve business owner.

The first tactic which the shark will employ is to use your naivety to gain your trust.  By building up trust, the shark will aim to bypass the various shark-proofing strategies which you have implemented into your business. Then once the shark has bypassed your defences it will wreak havoc on your business.  For example, the business partner who tries to highjack the business once it is making money and leaves you out in the cold; or the employee who decides to steal your clients;  0r the competitor that steals your ideas and gains a competitive advantage in the marketplace.  These sharks are out there which is why it is so important to make sure your shark-proofing strategies are robust.

Rule 1:  Never wrestle with a shark

Once you have realised that you have been attacked by a shark it is easy to think you will be able to fight your way out of the problem.  However, that is easier said then done.  Sharks are very canny when it comes to fighting because they have done it before.  If you have ever seen a shark hunt its prey you will notice that the shark employs a very clear tactic; before it goes in for the kill it tries to wear the opposition out.  You will see a shark poke and prod, and then role its prey along the seabed before finally tucking into its meal. The shark knows through experience that if it can tire out its prey first, then the prey will have little energy to fight back.  In the business context, to battle with a shark will usually entail some kind of legal action.  However, it is an unfortunate consequence of litigation that it costs a lot of money, not only in terms of lawyer fees but also in terms of the time you will spend away from your business sitting in court or in your lawyer’s offices strategising how to fight the shark. 

Sharks know how to play the litigation game.  They will manipulate the process to make sure it costs you money.  No matter how good your lawyer, the shark will drag things out so long that you will eventually run out of money to pay your legal bills.  Then they will move in for the kill and get the settlement they want.  All this time, your attention has been focussed on the litigation and not your business.  So rather than focusing your efforts on making money, your energy goes into fighting the shark (which of course entails you spending your profit on lawyers fees).  So revenue goes down and expenses go up:  a double whammy hitting your bottom line profit.  The shark knows this and in a perverse way enjoys the fight.  It knows that you will suffer more.

There will be situations where you will have no option but to embark on litigation to deal with a shark. However, the key to business survival is not to put yourself in the position where you find yourself up against a shark in a litigation environment.  That is the first reason why putting in place robust shark-proofing strategies is so important.  If you don’t, your profit is severely exposed to attack. 

Rule 2:  Build your defences and don’t leave yourself exposed

Before anyone buys a business there is a process which the purchaser should embark upon called due diligence.  Due diligence is essentially a pre-purchase inspection, just as you would carry out if you were buying a house. 

Very few people would buy a house without getting it checked out first and doing a bit of homework.  You may get a structural survey, check for any covenants on the land, check the zoning and make sure is was certified.  You certainly wouldn’t take the word of the vendor.

In business, it is exactly the same.  Nobody should ever invest money into a business without carrying out due diligence first.  Generally, due diligence is carried out by a lawyer or an accountant who would check every aspect of the business and identify whether there may be any exposure for the purchaser.  Essentially, what the lawyer or accountant is doing is assessing how much the business is shark-proof.  If the due diligence process reveals too many red flags then the advice will be not to buy the business or, at the very least, negotiate a reduction in the purchase price. Of course, that is not good news for the business owner who is trying to sell his/her business and too many red flags will make the business completely unsaleable.

That’s why you should shark-proof from day one

Imagine trying to build a house on shaky foundations using cheap materials.  When you come to sell your house no one will want to buy it due to the cost involved in rectifying the property and, even then, any steps taken to rectify the property may not fix any inherent faults completely.  Faced with a choice of buying a house built solidly from the outset and one that has been patched up, the choice is obvious. 

The same principal applies in business.  To fix up your business before sale will cost you a lot of money and may not completely rectify past problems which will raise their ugly heads in the due diligence process.  A far better route is to build your business on solid foundations using the best resources you can afford at the time.  By starting the shark-proofing process from day one of your business you put yourself on the right track to create a saleable asset when you are ready to implement your exit strategy. 

Rule 3:  Have a strategy for growth and exit

A significant number of first time business owners go into business to create a new revenue stream to replace a salary from a previous employer.  Whilst that is obviously important, it is very short-sighted.  Business, like houses, are assets.  When you are building a business don’t just think about the revenue it generates for you in the short term but always have an eye on resale.  If you don’t shark-proof your business from day one your asset becomes worthless.

 

To become an asset your business must have potential for growth

So what makes a business a valuable asset?  Those which attract the high dollar sales figures are those which have the potential for growth.  That way the purchaser is not only able to acquire existing revenue streams but also has the opportunity for developing those revenue streams or adding new ones. 

The problem with many businesses is that they fail to grow and therefore are unable to demonstrate the potential for growth to a prospective purchaser.  The main reason for failing to grow is that the business hits the ceiling of complexity. 

All businesses start small with the business owner or owners at the helm.  The business owners wear many hats from CEO to CFO, COO, Marketing Director, Sales Director etc.  As more customers come on board and sales go up, more people need to be employed to cater for the upturn in work or sales. The more customers you get and the more people you employ, the more complex the business becomes.  No longer can the business owner oversee every aspect of sales, marketing, finance, etc.  The business owner must delegate responsibility whilst at the same time ensuring the business is moving in the right direction. 

Effective delegation and control means that the business owner must first get out of the way of the business.  In the same way that a parent must cut the parental strings with their children when they reach a certain age, the business owner must let go of their business and allow the business to run itself.  That is not to say that the parents stop being a parent, or the business owner stops being the business owner, they just must let their offspring take their own course, confident that the offspring have been nurtured or brought up in the right way.  For the business owner this means ensuring that proper systems and procedures have been put in place to ensure that the business runs the way he/she wants it to be run.  Any parent would agree that the key to successful parenting is setting boundaries early on with their children to ensure they behave and turn into responsible adults.  Shark-proofing in the business context is also about putting those systems and procedures in place so that your business is robust enough to sustain growth. 

You can’t grow without shark-proofing first

Imagine putting a turbo engine into a Robin Reliant motor car.  The chassis of the car could not withstand the force of the engine.  Before long the car would get the speed wobbles and then the wheels would fall off entirely.

If your business is not structured for growth and you try to grow it regardless, the wheels will fall off your business and you could ruin it completely.  Some parents will recognise the tell tale signs of their children going off the rails, while others will miss them completely.  Have you got sufficient reporting structures in your business so that you can manage its growth and identify clearly if your business is starting to come off the rails?  When a business starts to wobble customers get fed up and employees become dissatisfied. Shark-proof from day one and you avoid this problem entirely. 

Why it is important to shark-proof from day one

So, there are three very good reasons to shark-proof your business from the start:

1.    to increase your profit

2.    to create a valuable asset

3.    to enable growth.

However, many first time business owners don’t engage in shark-proofing strategies for two reasons. 

The first is naivety.  As a first time business owner you don’t know what lies ahead once you jump off the pier into the big wide business ocean.  However, this book will give you a heads up on that front.  The second reason is cost.  Let’s face it, shark-proofing costs money, usually in professional fees (lawyers, accountants etc).  That is a cost which you may not be able to afford in the early days of your business.  Therefore, you will be forced to make difficult decisions about where to invest your start up capital and what can wait for later.  By reading this book you will be able to prioritise what needs doing immediately and what can wait until you have generated more cash.  For example, what is more important to your business: a flash website or a shareholders agreement with your business partner?  One may look cool and provide a good front door to your business, but the other may prevent you having your business taken away from you later down the line. 

This book will also give you strategies for keeping your legal fees down and increasing that all important cash flow.  Did you know that legal fees vary from firm to firm and there is no market price?  Do you know how to increase your cashflow so you can fund growth?  Armed with knowledge of what is important and strategies for keeping things affordable, you can set a realistic plan and budget for building your business whilst at the same time protecting you from shark attacks.  But first, let’s look at what sharks are out there.

YOUR SHARK SPOTTING GUIDE

In the ocean there are 350 different species of shark. In business, sharks come in all shapes and sizes and if you have been a commercial litigation lawyer for any length of time (like me) then you will probably have seen as many different types of business sharks as there are sharks in the ocean.

For the first time business owner that creates a problem because distinguishing a shark from an honest businessman can be tricky.  Don’t forget the shark is not going to announce his/her arrival.  Quite to the contrary, he/she will come across as being very trustworthy in order to get you off your guard.

But when you think of business sharks, don’t necessarily think just of those people whose sole intention is to rip you off.  There are others whose intentions at the outset may have been quite honourable, but when they find themselves in a certain situation behave in a shark-like way. People can change like this for many reasons.  Sometimes it is to do with greed and other times it is because of a perception that they have been wronged in some way and feel the need to exact revenge.

If people can change like this, how can you ever recognise a shark?  The answer is that you can’t.  The best you can do is understand the basic shark-like qualities so if any of those characteristics emerge in your business dealings, you know to be on alert.

This section shows you how certain types of people can become sharks and illustrates some of the damage they can cause. By knowing what to look for you are better equipped to spot the telltale signs before it is too late.   Implement the shark-proofing strategies in this book and you are well on your way to being shark-free.

So, let’s start with probably the least obvious group of people who could turn into sharks – your customers.

How your customers could turn into sharks

Your customers should be the life-blood of your business.  They are the people who pay your wages and allow you to put food and drink on the table every evening.  So how could customers possibly turn into sharks?

The problem with customers arises when they don’t pay.  If a customer doesn’t pay, you still have to pay your overheads.  Those overheads can be anything from wages to the ordering of stock.  If a customer places a large order with you and then doesn’t pay, you still have to pay your suppliers.  The cost of that will seriously eat into your profits and will adversely affect your cash-flow.  You can have a great business but if the cash-flow is poor you are going to struggle.  A lot of businesses rely solely on cash-flow to keep them afloat.  Even if a customer is late in paying, that can have an effect on the viability of your business. Then, your customers start to earn interest on YOUR money. Worse still you may have to borrow or get credit to run your business until they pay.

What if a customer doesn’t pay – what then?

When a customer doesn’t pay, you then need to make a decision as to what to do.  Do you write off the debt or do you try and collect it?  There are costs consequences of both courses of action and you need to be sure in your mind which avenue is best to pursue.

Believe it or not, the cost of writing a debt off can sometimes be cheaper than collecting it, particularly when you factor in the lost time engaging in litigation (just remember never to deal with that customer again!).

The strategies you need

To avoid all this happening, you need to have strategies in your business for ensuring that your customers pay on time and for collecting any debts that fall over-due. If you can’t manage cash-flow in your business it will sink like the Titanic. Chapter [5] explains the strategies for keeping your cash-flow healthy.

Don’t allow your employees to sink your ship

Most people will have heard of an employee disaster story. If you are less fortunate you will have experienced first hand the hassles an employee can cause if not managed properly. Of course employees are meant to be loyal, but that is not always the case.

When disloyalty turns to lost profits

Employees have been known to steal intellectual property, generally be dishonest, or simply irritate everyone they work with. All this can have a serious financial effect on your business.

Even the well behaved employees can be a problem if they are not performing up to certain performance standards.  Having a non-performing employee in your business can be like a cancer which spreads throughout your organisation.  Profits drop, and then you have the difficulty of terminating the employee’s position. 

Are you over staffed?

You may also have the best employees in town, but if you are over staffed then the extra wages are going to eat into your profits. However, the law doesn’t give you free reign to do what you want.

New Zealand Employment Legislation means that the process of dismissing employees is not as straight forward as you may think.  You can’t just sack someone on the spot even if you have a good reason. You must also follow a fair process.

Often while that process is going on you could be losing money. So, is there an alternative?

The alternative to employing staff

The alternative may be to engage independent contractors, but even that has its difficulties since you have less control over independent contractors. If you start to exercise more control then you run the risk that they start to claim they are employees.  The law has its own tests for deciding which is which, irrespective of what you have agreed. So, is not employing anyone an option?

Every business must grow to make money

If you are going to grow your business (and any business serious about making money will), then you will need to engage others to help.  First, you will need to decide the right time to engage someone, then whether to have employees or contractors. Once they are in place, you then need strategies for managing them. If you don’t, even the most good-natured employee can turn into a shark… read chapter 10 for employee shark-proofing strategies.

Then there are the sharks circling your business

By this I mean people who you rely on to provide products and services for your business.  These can be your suppliers, but also can include people such as your landlord or people who lend you money to finance your business. 

We have all heard the expression “loan sharks but did you know you can have supplier sharks and landlord sharks? Well, there is no reason why your suppliers cannot sign you up to a supplier agreement that could damage your business, or a landlord impose onerous covenants making your office lease a stone around the neck of your business.

These sharks can be sneaky

Sometimes, these agreements are put before us to sign and, enticed by the offer we forget to read the small print. Think of the small print as the shark’s teeth. Generally it is the small print which comes back to bite us.

What if the small print is gobble-de-gook?

But knowing what the small print means can be a problem if it is written in legal jargon. That’s when you need to know what to look out for. If you know the fish hooks to look out for the small print starts to make sense. Surround yourself with good advisors and you will be much better equipped not to get caught out like this.  If you don’t, you could end up swimming into the shark’s mouth and to near death. 

Till death do us part

That’s what couples promise when they get married. Yet we know from statistics that many marriages end in divorce. It is the same in business. 

If you are setting up in business with a business partner, they will probably be the last person you would expect to turn into a shark.  However, it happens often.  Whether they are a co-shareholder in your company or a partner in the strictest legal sense of the word, they could one day be your competitor.

The dangers of partners becoming competitors

When a former business partner sets up in competition to you it can seriously damage your business.  That is because they have had access to all your intellectual property, your systems and processes, which enable them to get a head-start in setting up their business in competition. They have learned from your costly mistakes and on day one of their business they are reaping the spoils of your break-up.

The divorce is likely to be messy

Break ups are usually preceded by power struggles and then difficulties arise when it comes to buying the other out.  Just like a divorce, business break ups can be very painful and very acrimonious. But it doesn’t have to be like that providing you have chosen the right vehicle for your business venture and have an exit strategy in place, in case it all goes wrong. More on that in chapter 4.  If you don’t implement the strategies in chapter 4, you can be sure to be spending your profits on legal and accounting fees.  

Could your lawyer or accountant be a shark?

I am not suggesting for one minute that your lawyer or accountant is out to damage your business.  However, who you choose to be your lawyer or your accountant must be handled with care.  Lawyers and accountants come in all shapes and sizes, with varying degrees of experience and charge-out fees!

The fees can be the killer!

One of the biggest complaints you hear about lawyers and accountants are their fees.  If you go to a lawyer to receive what you believe is simple advice, and end up with a bill that far exceeds your expectations, then that can have a very damaging effect on your profits and cash-flow.

The litigation example

For example, it would not be uncommon for a lawyer to advise a business to embark upon litigation because the business had a good chance of winning, only for the business to later find that the money recovered from the debtor was approximately equal to the legal fees incurred. The only winner in this case is the lawyer.  If you are going to instruct a lawyer or an accountant, you need to know what to look for and to understand how their charge-out rates work, so that you can make a better informed decision as to whether it is cost effective to get their help. Often justice comes at the expense of time and money.

It is certainly not the case that you should never use lawyers or accountants.  In fact the opposite is true.

Good use of a lawyer or accountant can save you both fees and profit, but bad use of a lawyer or accountant can cost you more fees and profit.

In my experience, businesses don’t use lawyers and accountants enough, and then end up spending more on fees when it comes to sorting out the mess. This book will help you decide when to use your lawyer or accountant and when it may be better to avoid the fees.

And finally … the obvious

Yes, your competition is there to compete with you, but they need not be sharks.  In fact, competition can be healthy since it keeps you on your feet and pushes you to better your product and service.  In many cases, without competition businesses become complacent and their product or service suffers alongside their profit.  However, there is healthy competition and there is unhealthy competition.  Unhealthy competition occurs when your competitors try to sneak an unfair advantage. 

How your competitors can get an unfair advantage

This can happen in one of two ways: either by misleading or unfair advertising (which is of course illegal); or by stealing, acquiring or using your intellectual property. 

What is IP and how can you protect it?

Intellectual property can be many and varied. Most people think of trade marks and patents. But it can also include your systems, processes, confidential information, know how and client lists. There are slightly different methods for protecting each type of IP and you need to decide what is essential to protect at whatever stage your business has developed to. At the very least you need to keep an eye on what your competition is doing. 

The consequences of not protecting your IP

The consequences of losing your IP can vary depending on your business. The best way of working it out is to ask what would happen if your major competitor had access to everything you owned – would you still be in business the next day?

Ultimately you need to have strategies in place to ensure that they don’t gain an upper hand and you end up having your profits eroded.  These strategies are in chapter 8.

By now you can tell that this book looks in much more detail at the specific strategies you can employ to ensure your business is shark-proof from each of these various types of shark.  Below we look at 3 general shark-proofing strategies which you can apply to all  types of business shark.

Three strategies for shark-proofing your business

There are essentially three strategies you can employ for protecting your business against the sharks.  None of them are completely watertight, but will put you in a much better position if your business comes under attack:

1.    ensure that you have written documentation recording what has been said and agreed with everyone you do business with.

2.    don’t become so involved in your business that you miss the big picture.  Instead, systemize your business such as to allow you to sit above the business and identify any weaknesses or downward trends.

3.    Grow.  Sharks play on the weak. If you are strong they are less likely to pick a fight.  If they do, you will have the means to be able to fight back. 

Now these strategies may seem obvious, but there is one big hurdle to implementing them:  Cost.

The cost of written documentation

In an ideal world, you would have a lawyer draw up every agreement for your business and cast their eye over every agreement you are asked to sign.  In large corporates that’s how things work.  But before anything gets signed it will be scrutinised by the company’s in-house lawyer.

 

Needless to say, if you are a small or medium sized business, you will not have an in-house lawyer.  That means going to a law firm for help:  welcome to the hourly rate. 

Now what may seem like simple advice to you may not seem the same way to your lawyer.  Similarly, whilst you might be expecting a two page agreement to solve your problem, your lawyer may be anticipating a 25 page document.  Needless to say, there will be a very big difference in the anticipated price. 

Why are legal agreements so long?

You may well ask why a legal agreement needs to be 40 pages long when 5 pages seems to suffice.  Ask a lawyer and he/she will tell you 20 or more different reasons why your agreement needs to be 40 pages long, but there are two real reasons. 

First, your lawyer doesn’t want you to sue them for negligence because that is very bad for business.  So, they are trained to cover every possible eventuality that might go wrong no matter how remote or unlikely.  As such, they will load the agreement with lengthy clauses to make it watertight from every angle.  Now whilst that is good lawyering, it may not make commercial sense from your perspective if you are paying an hourly rate for the drafting.  A simple agreement may suit your needs adequately.

Agreements never used to be this long

Of course, in the days of quill and ink, agreements were much sorter.  That’s not because the law was any less complicated, but because lawyers had to write out their agreements by hand.  If they made a mistake, they started again.  Nowadays, we have the word processor and that is the second reason why legal agreements have become so lengthy.  Now, in this day and age, producing lengthy documents is trouble free.  As a result, superfluous clauses get included into template agreements because it is no extra trouble to include them. Often it is easier (and safer), to print them than to delete them.

 

Now the flipside of the coin is that lengthy agreements make it much easier for lawyers to justify high charge out rates, but in some cases you may have to ask how much of the agreement is actually necessary from a commercial perspective.

Now unfortunately, there will be certain key agreements in your business which should be prepared by a lawyer.  One option could be to put something together yourself.  You will need to make an assessment on the circumstances and the next chapter helps you to do this.  You will also identify which are the key agreements later in this book.  In the next chapter, I will also give you guidelines on how to put an agreement together yourself.  But whether you go to a lawyer or put something together yourself, you must have some sort of written documentation.  If you don’t, you leave yourself exposed to a shark attack.

Sharks always attack an area of weakness

As your business becomes more complex, so you expose areas of weakness.  That’s where sharks will attack.  To give an example, say your business is inadequately set up to manage your staff.  An employee could take advantage of that and come in late, surf the internet all day, then leave early.  You are so busy in the business that this behaviour goes unnoticed, all the time losing you money.

You can engage business coaches, systems experts and HR professionals to help you systemise your business.  But again, that costs money.  So as a small business, the answer is to do it yourself.   If you do it yourself, don’t expect your business to be systemised overnight.  Systems evolve over time as the business becomes more complex.  The trick is to keep finding ways of making your business more efficient and making sure you maintain a handle on the information that is important so that you can track that it is moving in the right direction. 

Follow this simple cycle:

1.    Systemise – i.e. reduce a process down to the least possible number of steps

2.    Delegate – once you have made the process simple, get someone else to do it;

3.    Have reporting structures – i.e. put in place a simple reporting structure that allows you to easily to check that the system is being followed.

The mistake business owners make is that they don’t implement this cycle as an ongoing exercise in their business.  Instead, the business owner spends too long working in the business instead of on the business, and therefore ends up fighting one fire after another.  The business is therefore left exposed and is unable to grow.

Either grow or die

The business world is constantly changing and that has been no more the case than in the last 10 years.  The growth of the personal computer, email and the internet has changed the way we do business forever.  As a consequence, companies are able to offer solutions to customers faster, cheaper and with much better quality.  Those companies that are able to do this capture a larger slice of the market and take away the custom of those that fail to adapt.

Those companies that are prepared to innovate, actively pursue a growth strategy

You can measure growth in various ways:  employees, customers, sales, turnover, profit etc.  Whichever measure you choose you must actively pursue growth. But if it is your aim to stay still, then the reality is that you will go backwards because you will carry on doing the things the way you always have, whilst the business world continues to move on around you at pace.  Follow a growth strategy on the other hand, and at the very least you will keep pace and hopefully you will grow.  The speed of which you grow depends on how much you can innovate above and beyond your competition to provide a service or product that is good, affordable and quick.

But growth costs money

 

The easiest way to grow is to get financial investment into your business.  But any loan costs money to service and if you can’t service it then your business could be in trouble.  Many first time business owners may struggle initially to get finance.  That means growth will need to be funded from cash flow until such time as you can demonstrate a sound business model that a third party will be willing to lend upon or invest in. 

Whichever method you choose to finance your business, don’t make the mistake of stopping the investment into your business.  Once investment stops, the business stagnates and eventually dies.  If you want your business to become a big fish in the ocean then you need to keep feeding it.  Then, if you have capital at your disposal you can invest in further streamlining and shark-proofing.  If a shark does decide to attack you then you also have the funds available to fight, if that’s the routine you choose.  There is no truer adage, that the winner in litigation is often the party with the deepest pockets.  Part 3 of this book give strategies for growing safely.

Are you ready to take the leap yet?

You’re still reading and that’s great.  It means you’re now ready to be introduced to specific strategies which this book advocates.  Implement these strategies and your business will be shark-proof.  Shark-proof your business and you have a successful business.

 

 

 

 

 

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