How to Avoid Killing Your Startup with Bad Business Deals

06 APR 2012

As a startup entrepreneur you generally have to negotiate new business deals with people every few weeks in order to see your enterprise grow.

Those running larger businesses, where much of the intellectual property has been previously created and secured by others or where most of the key business relationships are already in place, are in a position to make little deals that incrementally grow their business without much risk.

For example, the Managing Director of Sainsbury’s can decide to experiment on placing standalone bakeries in train stations without putting much on the line. He might spend two million pounds on the test, but it’s a tiny fraction of the business he’ll do in a single day.

A startup entrepreneur, on the other hand, usually only has the hours of their team to invest, the intellectual property they can create in a given month or year, and maybe a few thousand pounds they’ve saved up from other activities. So when they do a deal (even a very small one) they are often tying up a huge percentage of their resources.

That means startup entrepreneurs have every reason not to be sloppy or cavalier about the deals they do and yet new business owners often make some of the most avoidable mistakes on earth.

Want to avoid making costly errors early in your company’s development? Her’s what do to . . .

Know why you’re doing a deal before you say “Yes”.

This sounds incredibly simple, doesn’t it? Who would agree to a deal for no reason? The answer is . . . lots of people.

Let’s say you’ve come up with some good product or service. Perhaps you’re a producer with a good movie and someone wants to buy the right to distribute it. Perhaps you’re a programmer with a little widget that accidently went viral and now someone wants to license it from you. Perhaps you own a little marketing business and some fast talking mid-sized business liked a campaign you’ve run for someone else and they now want you to handle their account.  If you’re like many new business owners you’ll say “Yes”to a deal simply because you’re surprised anyone is talking to you at all. You’ll feel its easier to work with someone who approaches you than to go find someone better to work with and you’ll want to believe it is easier to execute someone else’s plan than to come up with one of your own.

If you can’t state explicitly, and provably, how a given business deal will effect you, your company’s profits, and your company’s future you don’t have enough data to do a deal. Don’t go forward until you have those answers.

Don’t pretend you aren’t doing a deal.

The only thing worse than saying Yes to a deal you don’t want is not signing an agreement because you aren’t sure you like the terms or don’t understand the terms . . . then doing tasks outlined in the agreement anyway.

New business owners do that a shocking percentage of the time. They start work on a handshake deal and never go forward to create a real contract. They don’t understand that if you create anything or acquire anything (customers, assets, etc) under that half-contract no one knows who owns it and that means the property is compromised.

It means that if you’re the least bit successful you will have created something that has to be fought over and argued about before it can be fully exploited. That vastly decreases its value.

So don’t start work until you have a clear letter of agreement or contract that outlines who does what, who owns what, and how property will be broken up if the deal is dissolved.

Remember that you and someone else can both agree to own a list of customers, a piece of code, a collection of content that you develop. You can both gift one another the right to exploit it any way you want.

If you are working with someone, perhaps another startup owner, who has nothing to invest, that kind of deal means you can both reap the rewards of your combined labor.

If you are working with someone who is going to provide payment, you need to work out what exactly they own and what they expect for the money they provide. Make sure it is very clear how either of you can terminate the deal and who takes what with them when they go.

If you can’t afford a lawyer for an hour or two to review an agreement, you can’t afford to do the deal. Don’t share a lawyer with whoever you’re doing business with to save money because that attorney has a built in conflict of interest. Rest assured he is working for the guy that pays him.

If you are doing any deal that’s going to suck up weeks of your time, or under which you’re going to create anything or pay for anything to be created, you need a contract.

Don’t try to weasel out of a deal without letting the other guy know.

Want out of a deal? Do not ask the opinion of thirty mutual friends and business associates to find out what they think. That makes you look unprofessional. Don’t just stop work and move on to other things. That may mean that new work you do comes under control of the contract you didn’t dissolve.

Pick up the phone or send an email or schedule a meeting and say “This isn’t working out. Why don’t we stop and move on to other things?” If you expect things to be contentious, contact your lawyer first.

Doing anything else usually maximizes the negative impact of a terminated business relationship on your enterprise. A clean, honest, straight-forward approach to terminating a business deal minimizes costs when all is said and done.

Don’t do joint ventures or negotiate long term business deals with people you don’t know and can’t find out about.

When you’re a small business, hungry for cash, just becoming visible to a wider world, you’ll come into contact with people who want to do business with you. Some may have something great to offer, many won’t. You need to know who they are and how they work in order to know if they can keep any promise they make you.

How do you learn more about them? Look up their business on services like Dun and Bradstreet. Hire a detective to run a background check. Get references from people they’ve worked with that you can verify as being successful. There are a million ways to learn what you need to know.  But find out who they are, what they’ve done, what their patterns are before you sign and agreement with them. Always remember that a bad business relationship early in the life of your company can put you right out of business.

A good beginning matters . . .

Many of the most important relationships you’ll make for your enterprise are those you negotiate in its earliest days. While you must remain open to new opportunities, you must also become proficient at vetting those opportunities to ensure that you invest time and effort into those that will pay off.

If you can follow the four guidelines above you should manage to avoid doing bad business with all the wrong people.