What's new
What's new

Business owners, I need your financial expertise

garyhlucas

Stainless
Joined
Oct 17, 2013
Location
New Jersey
I will apologize if the title is incorrect, I didn't know how to word it.

I am asking for help here and would like to share this thread with my boss without any editing so I am hoping we can stay on topic and avoid snarky comments. Thanks in advance.

A little background on our problem. I am being asked to sign an employment agreement after working for the company for almost 5 years. I was working for the owner at another company he owns and moved over to this company to develop new products. I warned him of the need for employee agreements at the start as I have management experience in multiple manufacturing companies. I have invented (mechanical design, electrical design, PLC programming, CNC programming of parts, Startup and debugging) all of our products except one minor one. Without me at the current time they will not be able to build the products because all the other employees have been here for a short time and most don't even know how the product works. I have been training everyone and recently my best young engineer left because he wants to pursue a PE and can't here. Finally I turn 65 in July, but have no plan nor desire to retire any time soon as I enjoy what I do.

The employment agreement raises my salary to 100K and gives me royalties of $1000 to $7500 per sale with the bulk being around $5000. My royalties extend two years past my last date of employment for any reason. Currently there are about 7 jobs in the pipeline. My title is Director of Innovation a non-operating position. So this is really very fair and I have have absolutely no quarrel with the terms. The one thing I lose after signing this is leverage. I think that is important because I am fairly sure I won't collect much more than my salary for the next year because the company will fail.

We had a meeting on Friday about the employment agreements for all employees. It was attended by all 9 employees and the owners lawyer and an HR lawyer. It started with a power point presentation that lasted over two hours talking about all the great opportunities the company has. It also introduced the new organizational chart. It has the owner as CEO with five management positions reporting directly to him. There is no operations manager under him and his whole career is as a sales rep, no manufacturing experience at all. He is also CEO of his sales company and accounts for more than half their sales despite having 5 salesmen and is frequently out of the office. Question #1 do any of you company owners or managers see a problem with this arrangement?

We sold one system for $100K, basically our cost about 3 years ago. We sold the second system along with many improvements and a building/tank for $250K, again a little above our cost. We sold two mores systems at about $250K each which should be reasonably profitable except permitting issues now have the installation and payments a year behind. The first is in the shop now for actual construction. We took a retrofit job that was supposed to bring us cash but not identifying all the issues means that I believe we paid out likely $50K over cost. We just won three new jobs all for $250K to $500K or so, and we are the basis of design for a number of municipal jobs worth $1M or more. We also have quotes out on probably 50 systems based on a parade of very impressed potential customers visiting our shop and the two operational job sites.

In the meantime we have moved from our cheap shop space to a brand new higher rent building that only gained us fancy office space, no additional shop space to build the products. There is empty space for rent on the other side of the shop wall. In anticipation of all this work we have increased to 10 employees, and our current burn rate is about $60K a month. Sales over 4 years have brought in maybe $400K and the rest is a cash infusion from the owners other company or other sources that I may not know. I estimate maybe $1.5M spent so far. We have not achieved profitability nor break even yet.

In the meeting the owner showed a slide of the hockey stick progression of sales orders. I think he believes that the same approach to growth for his sales company will work here, sell your way out of a cash flow problem. In his other company he spends money for years chasing jobs and they celebrate when they get a PO because their work is mostly done. In manufacturing the PO is the start of all the spending. I believe that the hockey stick chart of sales growth has a reverse hockey stick of cash required to deliver that product. I think our $60K burn rate with nothing going out the door can only get much much bigger. So question #2 is what do you guys think?

The owner has been searching for money. When I asked him he said he had not found an outside investor and he made a disparaging comment about Venture Capital vultures that surprised me. So I think he may have decided to go it alone and that is why he is doubling down on making sales. I get it, I understand the Golden Rule of business, he who has the money rules. So in that vein I proposed a way out of this situation. I think we should hunker down and give up our fancy office space and move our employees into what is now our kitchen with a few motivated employees sitting around one big table. Cut our employee count in half and get rid of everyone that isn't motivated or is working on projects to big for self financing. Currently that is the bulk of what they are doing. We have lots of quotes out for small systems that are bearing fruit. We do the big systems when we are profitable. So question #3 is does this sound like it would work?

So from my perspective right now regarding the employment agreement. If the owner is going it alone I feel the need to use whatever leverage I have to help him succeed. If he doesn't I'd really like not to be bound by any kind of agreement about what I consider to be my intellectual property. If he continues and finds out that he can't pull it off then an outside investor is a rescue investment. That's a fire sale for pennies on the dollar and I may get a pink slip or just a new boss. Or he might sell the company at a large loss with similar results. In the latter two cases maybe I can bargain for an even better agreement with the new owners? Opinions?

Thanks to those of you that take the time to read this tome.
 
The owner has been searching for money. When I asked him he said he had not found an outside investor and he made a disparaging comment about Venture Capital vultures that surprised me. So I think he may have decided to go it alone and that is why he is doubling down on making sales. I get it, I understand the Golden Rule of business, he who has the money rules. So in that vein I proposed a way out of this situation. I think we should hunker down and give up our fancy office space and move our employees into what is now our kitchen with a few motivated employees sitting around one big table. Cut our employee count in half and get rid of everyone that isn't motivated or is working on projects to big for self financing. Currently that is the bulk of what they are doing. We have lots of quotes out for small systems that are bearing fruit. We do the big systems when we are profitable. So question #3 is does this sound like it would work?

I think what you said here is the only real solution to the problem as I read it. The cash burn at $60k is going to catch up in a hurry. Cut the cash burn as much as possible and take on only those jobs that YOU determine look profitable.

I like the owner's approach to "selling your way out of a cash crisis". I have worked for (and know of) way too many businesses that start tracking rubber bands and paper clips when things get tight and I think that is a recipe for disaster.

That being said, there is still a limit to what one program manager (you) can accomplish given the paucity of talent you are faced with at the current time.

If you can put together a dynamic team in the future then re-visit the strategy. For now, deficit spending with no limits is going to catch up to you in a hurry and then everbody loses.
 
Well, you could try to spin the terms of your royalties to front-load your payment to when contract is signed instead of (assumed) payment when final invoice is paid. That way you're OK regardless of factors you have only limited power to control. Not the usual way of doing things, but not a usual situation, either.

The employment contract may be a reaction to VC issues. Why would VC invest if the 'only guy who knows what's going on' is 65 and has no contract to stay there? Seems like if you leave (or start pushin' up daisies) they're toast. Of course, no contract will help with the daisy thing.

Get with a lawyer to see what's possible in terms of making your contract durable across new ownership. Will probably have the term 'and their assignors' in it, or something. At minimum it could result in some nice going away presents in the event of takeover. Downside is you may have to work five years for a group you're not fond of.

Seems your real challenge is being able to scale up your execution to match sales. Secondarily (but still important) is the challenge of controlling expenses in the face of that scaling-up task. Having lots of sales is a good problem to have, but folks forget the 'problem' part.

What's the possibility that you're winning all these 250/500k projects because they're really 500/1mil projects that are being underbid? Because paying the rent/staff and still losing money also means you're losing profit, which is needed for growth. Profit=what's left over after everything else is paid for. Charge more. You'll have fewer sales, but they'll all make you money instead of tanking the company.

Any competitors in the field that would be a good merger/acquisition/parnetship target? Or related industries that may be slow right now, but have adaptable skillsets?

Figuring out how to make money is a worthwhile chore.
 
Last edited:
Gary, I don't think this thread will help you, as it's not really financial advice you need, but management and career advice. I've followed your posts for a while, and you seem very competent in your field (at least, that's what you write), but allow yourself to fall victim to poor management structures or crooked partnerships.

If that's an accurate assessment, then addressing this for yourself will open up more opportunities for success on your end. Eyes open, bad habits addressed, even at 65 it can be done. Or so I hope, I'm not far behind you!
 
Hi Gary:
I think what you've described is fundamentally a mismatch between sales and execution as has already been pointed out by you and others.

So my first question: is the price these items are sold for, a fair market price, with room for profit if the execution can be brought up to a proper standard.

If so, the business has a chance at success.
If not it's a dead duck no matter what else happens.

If we assume the first to be true, then if it is to stand on its own, all available resources need to be channeled toward fixing the execution problems and that is achieved by intelligent investment in a workable plan, which of course starts by identifying the problems.
This is a proper task for someone like yourself.

If on the other hand, it is a viable price but the owner does NOT intend to stand entirely on his own, the main job is to get investors in who can front the cash needed to allow you or someone like you to do your magic.
That is a sales and marketing task first and foremost and should fall squarely in his domain, HOWEVER, the capital he brings in still need to go substantially toward solving the execution problems which means whoever is in your current role needs authority and resources and need a priority place in the line up for money and manpower.

Saving paperclips to the point where you cannot do anything is not going to get you anywhere, but blowing it on coke and hookers will catch up with you too, even if it brings in lots of money simply because it ends up like the pyramid scam where the cash in can't keep up with the cash out no matter how big the flow gets.

My recommendation to you is to determine first whether it even has legs, and if it does, to decide in broad strokes what you'd have to have and to do to solve the execution problems and get profitable sales going.
I'd also be putting in a strong recommendation to bring in outside capital, and I'd justify it with a pro forma budget
The last thing I'd do is count rubber bands, but I'd make every major purchase subject to a prior execution plan so it actually contributes something toward solving the lack of profitability.

Clearly your guy can sell; that is a terrific asset well worth investing effort in.
So I'd be very hesitant in condemning it as a stinker...sounds to me like it might just need a small hand over the bump to become a winner.
That'd be great for you and great for him.

Good luck with it!

Cheers

Marcus
Implant Mechanix • Design & Innovation > HOME
Vancouver Wire EDM -- Wire EDM Machining
 
I like the owner's approach to "selling your way out of a cash crisis". I have worked for (and know of) way too many businesses that start tracking rubber bands and paper clips when things get tight and I think that is a recipe for disaster.

Joe,
This is the essence of the problem I see. I think many people confuse Cash Flow with Profit. Someone correct me if what I am saying here is wrong.

Cash Flow is the RATE you spend your Operating Capital. Operating Capital consists of the money you put in to start up, loans you may get, deposits on jobs, Retained Earnings (profit from prior jobs)and trade credit. The things that you spend the operating capital on are rents, payroll, materials, taxes, utilities ,loan repayments etc. You really can't defer any of those items so if you run out of cash everything pretty much comes to a halt.

When I was running the electrical contracting business I grew the company very quickly. That was possible because we had no debt, we had been in business for 30 years with a ton of trade credit, and dad hadn't actually billed a lot of work that had been done and I only had to to collect it. However at one point my bill at the supply house surpassed $100K and I had a serious talk with their owner to avoid having my supplies cut off.

Then I started a new manufacturing business. 3 years of R&D and I went to market. Sold $100K in last 3 months of the year and lost $250K, my cash and some from dad. Sold $200K in year two, lost $200K of dads money. Sold $400K in year three and lost $20K. Was planning on $750K in year four when the stress got to me and I brought in a consultant. He helped us to understand that to do $750K we needed $200K in cash! Currently we had zero cash. His projections for even higher sales numbers had us needing $1M in five years. It was at that point I suddenly understood cash flow and had no choice but to join forces with a larger company.

I then went to work for a small manufacturing company that had gone bankrupt once before and been saved at the court house door by a large order paid 100% up front. We were two weeks from going bankrupt again when the owner made me the manager. Understanding cash flow I avoided the chain on the doors and within a year were profitable. The owner then started selling like a maniac and the cash flow problems came back, but I was gone.

Then I went to work for one of my ex-employees that wanted to start a business, and had the shoestring. He managed cash continuously and shared his Quickbooks projections with me every month so we stayed on target. After 4 years we wer at breakeven when the unthinkable happened. An employee of a customer was injured and the customer claimed he was injured on the machine we built. It was all a lie, but the suit was real and the bosses lawyer advised closing the corporation quickly since the lawsuit would wipe us out in court costs.

I went to work for a customer of my previous job to clean up the projects we had been working on. After two years I was going to leave when he convinced me that his extremely profitable business could fund a startup to build the machines I built for him. We got some orders and I carefully managed cash flow. At the two year mark we had broken even and were ready to start actually marketing nationwide, having put in no cash. It was then that he revealed that he had spent $1M on homes for his inlaws and we had no operating capital at all.

With this experience you might think my advice would carry some weight. Instead he is bound and determined to bury us.
 
Gary, I don't think this thread will help you, as it's not really financial advice you need, but management and career advice. I've followed your posts for a while, and you seem very competent in your field (at least, that's what you write), but allow yourself to fall victim to poor management structures or crooked partnerships.

If that's an accurate assessment, then addressing this for yourself will open up more opportunities for success on your end. Eyes open, bad habits addressed, even at 65 it can be done. Or so I hope, I'm not far behind you!

Milland,
This is my legacy job. No way I try again. I blame no one for my failures because I learned a lot each time and the subsequent failures were never a repeat. I understand that a personality flaw is likely responsible for not having real success and I have really tried to correct that, to no avail.
 
Hi Gary:
I think what you've described is fundamentally a mismatch between sales and execution as has already been pointed out by you and others.

So my first question: is the price these items are sold for, a fair market price, with room for profit if the execution can be brought up to a proper standard.

If so, the business has a chance at success.
If not it's a dead duck no matter what else happens.

If we assume the first to be true, then if it is to stand on its own, all available resources need to be channeled toward fixing the execution problems and that is achieved by intelligent investment in a workable plan, which of course starts by identifying the problems.
This is a proper task for someone like yourself.

Marcus,
There is absolutely no question this line of products has legs. When I designed these products the goal was to have the lowest cost system that worked better than anything out there. We've done that, the cost for our systems is half of the very similar systems I was building at my last job. We cost everything continuously and after 4 years we are still within 10% of our original estimate. Our plants work extremely well, are really easy to maintain and use less power than anyone else.

Our customers nearly all have failed systems that have been shut down and they are trucking wastewater away, or they are paying heavy fines. Our first customer was fined $60K and got $30K reduced when our system actually worked. We have four systems replacing the systems from one failed competitor, and they sold hundreds over the past 30 years. They all HAVE to buy new systems.

The problem is the owner can not contemplate losing a sale. So some jobs do get sold too cheap. We are also bidding jobs way to big for us to handle which in some cases need equipment we haven't even designed yet! That sucks up resources that should be going to products that we can just bang out.
 
So out of all this, I read that you're the "brains" man, the boss is the "sales" man.

I personally would have a difficult time, with "my" designs, labor & effort being sold, with very little royalty. Especially if you're having to manage the operations.

Question - Who's managing the finances & cash flow?

If the sales guy can't stomach the idea of losing the sale, then you trade jobs with him for a little bit. Let him see the operations, labor, etc. that goes into building a machine, and getting it ready for delivery & install. That may help him understand the true "costs" - in terms of labor, etc. - of producing a machine. It may help put into perspective that selling at a reduced gross margin, is actually jeopardizing the NET profitability of the company.

If you haven't already, then you all need to really focus in on minimum profitable sales margins. Everyone needs to understand that selling below the red-line, means the company loses money after delivery, install, after-sales warranty claims, etc...

Also, don't discredit the importance of his sales skills. That is a much more valuable & underappreciated skill than most people realize. After all, the best ideas & the entire business, are all worthless without sales...




That's just my narrow view on things, after having worked in several shops, including custom machinery builders, and now in sales...
 
If your selling a good product for 250k and your competition is selling OK units for 400-500k, why are you doing that? Why wouldn't you sell your units for 300 or 350?


Sent from my 2PS64 using Tapatalk
 
Nothing personal.

Nothing to do with your worth as a human being.

Nothing to do with your competence at YOUR core job.

But.. if the Next-Higher is good enough at HIS job to effectively manage toward his goals?

You will be out the door for this stunt. Firing offence. Anywhere.

If he FAILS to exercise that fundamental right?

Then he will NOT make his goals.

When.. the finest widget Inventor in the known universe f**ks up his superior's plans and reveals confidential information in a public forum?

He is compelled to terminate that problem-creator, seek to hire the SECOND finest widget inventor - or the third finest. Or the four-hundredth finest - and make the best of it he can do. That.. is what HE is paid for.

The stakes are huge. Far beyond "just you".

FAILURE to enforce any policy - be it basic confidentiality, insubordination, safety - any policy, written or implied - undermines any future right to enforce that policy.

He has a legally recognized fiduciary responsibility to protect that firm. The confidentiality of its operations and finances. And its future.

He has no choice. You have not left him one.

That basic. That inflexible. You could even be sued for revealing information a competitor can use to damage the company's prospects.

I'm actually astonished that you've made it past your first-ever job and not realized that tails wag dogs only at the risk of being bitten.
 
Gary, thermite is raising additional points, and goes beyond what I mentioned as concerns. This thread isn't really going to help you, and may prove to be problematic. You should consider trying to get it removed.

Perhaps a reformatted and less identifiable posting could help address your issues. Separate "yours" from the business "theirs" as best you can.
 
Go talk to a lawyer - not the employers lawyer but one that specializes in this area of the law and represents YOUR interests only. JMHO
 
And before it all goes away...
Your young engineer that just left for PE opportunities -- is he covered under any NDA? That may be an issue if he goes to the bigger, underperforming competitor. Inside information with few constraints in a well-capitalized, motivated and newly-hungry opponent. Danger, Will Robinson.

However, if I was closer to NJ, I'd come knockin' on your door for the sheer challenge of it all. Apparently, I'm a glutton for punishment.
 
Nothing personal.

Nothing to do with your worth as a human being.

Nothing to do with your competence at YOUR core job.

But.. if the Next-Higher is good enough at HIS job to effectively manage toward his goals?

You will be out the door for this stunt. Firing offence. Anywhere.

If he FAILS to exercise that fundamental right?

Then he will NOT make his goals.

When.. the finest widget Inventor in the known universe f**ks up his superior's plans and reveals confidential information in a public forum?

He is compelled to terminate that problem-creator, seek to hire the SECOND finest widget inventor - or the third finest. Or the four-hundredth finest - and make the best of it he can do. That.. is what HE is paid for.

The stakes are huge. Far beyond "just you".

FAILURE to enforce any policy - be it basic confidentiality, insubordination, safety - any policy, written or implied - undermines any future right to enforce that policy.

He has a legally recognized fiduciary responsibility to protect that firm. The confidentiality of its operations and finances. And its future.

He has no choice. You have not left him one.

That basic. That inflexible. You could even be sued for revealing information a competitor can use to damage the company's prospects.

I'm actually astonished that you've made it past your first-ever job and not realized that tails wag dogs only at the risk of being bitten.

This isn't a stunt. The owner and I go back nearly 15 years, and I've been here five. If this business fails I have lost only the tons of of unpaid overtime I have been putting in to help a friend succeed. I'm not trying to save my ass, I'm trying to save his. I just can't find the right words that will get him to understand something about the business that he clearly does not understand. I know he doesn't understand because he says things that clearly are not true and he would know that if he understood what I am trying to say.
 
And before it all goes away...
Your young engineer that just left for PE opportunities -- is he covered under any NDA? That may be an issue if he goes to the bigger, underperforming competitor. Inside information with few constraints in a well-capitalized, motivated and newly-hungry opponent. Danger, Will Robinson.

However, if I was closer to NJ, I'd come knockin' on your door for the sheer challenge of it all. Apparently, I'm a glutton for punishment.

Nope the young guy could actually do that. I pointed this out to the owner before I became an employee of this company 4 years ago. The employment contracts especially in my case are clearly closing the barn door long after the horse has gone.

By the way I live in NJ. The company is in the Baltimore area, 160 miles from home! I have a room here that I rent and work from home two days a week most of the time. Been doing it five years now.
 
This isn't a stunt. The owner and I go back nearly 15 years, and I've been here five. If this business fails I have lost only the tons of of unpaid overtime I have been putting in to help a friend succeed. I'm not trying to save my ass, I'm trying to save his. I just can't find the right words that will get him to understand something about the business that he clearly does not understand. I know he doesn't understand because he says things that clearly are not true and he would know that if he understood what I am trying to say.

Some jobs, some circumstances, you just cannot be he who succeeds in effecting that conveyance.

You both need a third-party with arms-length distance from the trees to see the forest.

Otherwise? Keep on doing the same thing over again, and expecting a different outcome?

Cool Hand Luke (1967) - The Captain's speech " What we've got here is failure to communicate" - YouTube
 
This isn't a stunt. The owner and I go back nearly 15 years, and I've been here five. If this business fails I have lost only the tons of of unpaid overtime I have been putting in to help a friend succeed. I'm not trying to save my ass, I'm trying to save his. I just can't find the right words that will get him to understand something about the business that he clearly does not understand. I know he doesn't understand because he says things that clearly are not true and he would know that if he understood what I am trying to say.

Just to bring this all full-circle. It seems your original post was asking about signing an "employment agreement" to which you seemed satisfied with the terms.

But then later, you state that if you sign, you lose any/all leverage. Leverage for/against what?

And then, you're concerned that the business will fail - run out of cash(flow) mainly.



What is your goal here?



What does signing an employment agreement help/solve, on either end?

What leverage would you "lose"? The ability to re-negotiate the terms?

If the business fails, then the other stuff doesn't matter I guess, does it...?




If you are so integral to the business, and contain all the knowledge to run the engineering, operations, financials, and the business is headed for a [financial] nosedive, then why not lineup your own financing, and buyout your friend. Retain him as a commissioned sales person, and keep the business running in the black?
 








 
Back
Top