What to Do With a Major Windfall

Windfall Worries

Clearly, windfalls can help you. They can also hurt you if not handled correctly. One risk of receiving a stroke of luck is that you'll be fooled into thinking that's the way things are going to be from now on. It's all too easy to respond to a one-time cash infusion or short-term sales surge by increasing costs long-term, warns Bruce Kemelgor, associate professor of management entrepreneurship at the University of Louisville in Louisville, Kentucky.

Common mistakes of windfall recipients include expanding by purchasing new machinery, expanding into new space and hiring new employees to a degree that isn't justified by the long-term prospects. "Sometimes it paints an unrealistically optimistic picture of the future," Kemelgor says of a windfall event. "When reality strikes, it strikes hard, and then they're not further ahead-they're behind."

The essence of a windfall is that you are not prepared for it. But what if you get that big order and can't handle it? Sometimes production requirements are so far beyond your existing capacity that you would have to expand more than is wise. In those cases, you may be better off turning down the windfall. "If you are not in a position to exploit the opportunity, it becomes very risky if you still seek to take advantage of it," says Kemelgor.

Even if you are able to handle a sales windfall, your systems may become so stressed that your company's performance will fall to a dangerous level. If your longtime customers receive inadequate service or quality while you pull out the stops to handle a one-time event, you may wind up damaging relationships that will cost you far more in the long term. "People need to appreciate whether something is a true opportunity or [really] a veiled threat," says Kemelgor.

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Sometimes the hardest threats to detect are contained in the terms of an agreement. A cash-rich lawsuit settlement, or a contract from a new customer offering high volume, may look good on the surface-while the devil resides in the details. Settlement terms may include restrictions, such as agreements to eschew publicizing a settlement, which make it difficult for entrepreneurs to leverage legal success into business success. Similarly, orders that offer large unit volumes may also demand unit prices so low that profits virtually disappear.

"Sometimes your eyes get big, and you think it's the chance of a lifetime, and you don't see the risk," Kemelgor says. Big buyers may be more interested in getting one order filled at a low price than developing an extended relationship with a supplier. If it turns out that you can't fill their order without risking bankruptcy, Kemelgor says, "They're not going to help you. They're just going to walk away."

If the terms are good and the volume isn't too high, one key remains: Is this a business you can succeed at? Entrepreneurs may be tempted to tackle a new customer who waves a big order, even when the product or service is one that, while similar to what they're already doing, is different enough to make success uncertain. Convenience Kits International found that its airline order, in addition to being very large, required it to assemble more items from more sources than the company was used to. "It was a different type [of] order altogether," says 40-year-old co-owner Autumn Lido, Benjamin's sister. The kit came in a larger bag than they normally used, and the airline wanted its logo imprinted on the container. That meant they couldn't sell the kits to anyone else if the deal fell through. The size, sourcing and customization issues meant this deal was, while promising, fraught with peril. But the Lidos decided what they had to have and wrote their own terms. "We told them we had to get money upfront to make the product work for us," says Autumn. The airline agreed, and as a result, the deal worked.

From a single windfall, the Lidos look for benefits to keep on flowing. Benjamin is eyeing nonretail markets for their products, including premiums, corporate logo items and custom kits with items tailored to certain industries. "Alternative markets could very well be larger than the retail people," he says, pointing out that windfall surprises can come at any time. "We have big business in the premium industry, where we had nothing before."

A Run of Good Luck

Windfalls have pushed countless entrepreneurs into prominence. A World War II contract for down-filled sleeping bags took Eddie Bauer from being a low-profile sporting goods manufacturer in Seattle to being a household name. Bill Gates would likely still be a small-time software developer if IBM hadn't unexpectedly chosen MS-DOS as the operating software for its new PC. Silly Putty would probably still be an unutilized chemical oddity if a columnist for The New Yorker hadn't raved about the obscure toy in an unsolicited plug, causing hundreds of thousands of orders to pour into the mailbox of its nearly penniless promoter.


 

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This article was originally published in the July 2003 print edition of Entrepreneur with the headline: A Mixed Blessing.

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