Artistic, charming and indefatigable, Ken K. turned his
garage-based business into a multimillion-dollar outfit. But
somewhere along the way, he let a couple of crafty investors bail
him out of a perilous cash crunch. The details didn't seem
important at the time, but the money was. Hastily, Ken signed on
the dotted line--not realizing he was also giving up control of the
company.
Inevitably, friction developed. Within months, the investors
fired Ken from the company he had created, throwing him out of his
own office.
Ken couldn't believe they could do that. Yet any lawyer
would have told him so--before he closed the deal. Too bad for Ken,
because it never would have happened if he'd been able to
recognize this arrangement as one of the 10 deals every
entrepreneur should avoid:
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1. Any deal you don't fully understand. It is written
that the big print giveth and the small print taketh away. Legal
documents can be treacherous. The fine print often gives one side
rights that would make the other side shudder. After all is said
and done, the formal contract must answer these questions:
- Exactly what are you responsible for?
- Exactly what are they responsible for?
- What rights do you have if they don't
perform?
- What rights do they have if you don't
perform?
- How long will the deal last?
- How are approvals, control and ownership divided?
Investors, for example, generally want equity in a company
because with it comes ownership and, usually, control of the
enterprise through voting rights. Ken didn't keep his eye on
the stock ledger; by giving his investors the majority vote, he
gave away the store.
Here's the overall lesson: The more important or complex
your deal, the more you'd better understand all its
consequences. That means asking lots of questions, reading
everything carefully and, above all, getting professional
help--especially from your lawyer. Otherwise, you may be in for a
rude awakening.
2. Any deal requiring lots of money upfront. Deep down,
every deal is just a hostage exchange, and it's in those taut
moments between the giving and the getting that deal makers are
most vulnerable (and con men most effective). Time your performance
so you get (or hold on to) as many marbles as soon as (or for as
long as) you can.
Structure your exchanges so you don't give up everything at
once. Do the deal in stages, take collateral, use an escrow or
leave yourself a way to cancel payment. This concept applies to
services rendered, rights granted and anything else you exchange.
Every lawyer knows possession is nine-tenths of the law. And the
con man lives for that special moment when his carefully coddled
egg hands over the dough.
3. Any deal you're asked to do in a hurry. Skillful
deal-making requires careful deliberation, conceptualization and
negotiation on both sides. Very few good deals have to be done
"yesterday." Remember, the phony deadline is a classic
sales gambit used to maneuver a prospect into a quick close. So
whenever you're given one, test it: Press the other side for a
detailed, plausible explanation, and be skeptical of what you hear.
Ask for an extension to see if their reaction fits their
explanation. If you can, contact an expert or someone inside the
company for additional verification. Or, if you feel gutsy, call
their bluff. Remember: When the other side's hurrying and
hassling you, it's because they know if they let you think
once, you're sure to think twice.
4. Any deal with people you don't know or companies
you've never heard of. If you don't know who you're
dealing with, you'd better find out. Discourage lying by
letting strangers know upfront that you're going to check them
out thoroughly. Then do it. Talk to people in your local business
community; call references the other side provides you--and ask
your colleagues, friends and customers to find (and call) the ones
they didn't provide; get a credit report; verify licensing,
professional history and education directly with the appropriate
boards, businesses and schools; and contact the Better Business
Bureau, the Federal Trade Commission (FTC) or your state attorney
general.
Want to go further? Hire a private investigator. It's not
devious; 90 percent of what you'll need--and what the
investigator will find--is already public record: vital statistics,
lawsuits, criminal history, bankruptcies, real estate ownership,
corporate filings and the like.
5. Any deal where you're being harangued, manipulated or
schmoozed. You don't have to be the brightest candle on the
birthday cake to recognize bluster, belligerence, insults,
lecturing, screaming and constant interruptions for what they are.
Bullies use intimidation because, in the short run, it works.
But you also need to keep your eyes peeled for the sneak attack.
One opponent charms your socks off while exhausting you with
all-night talks in uncomfortable surroundings. Another plies you
with fine food and wine before scrambling data and the fine points
of the deal.
If you're being victimized, you have several choices: You
can ignore the manipulator and keep talking about the issues. You
can tell them (gently) that you know what they're doing. Or you
can simply walk away.
6. Any deal that's set up like a pyramid scheme.
Multilevel marketing, also called MLM or network marketing, is a
way of selling goods or services to consumers through independent
distributors. Amway, Avon and Tupperware were built that way.
Pyramid schemes resemble legitimate MLM plans but are in fact
illegal scams in which earlier participants in the plan are paid
with money taken from the new participants they recruit. How can
you tell the difference?
"If a company urges you to buy thousands of dollars worth
of inventory at the very beginning of your relationship or promises
you will earn fantastic amounts of money after only a few weeks in
business, run as fast as you can in the opposite direction,"
says Jeffrey Babener, a Portland, Oregon, attorney and MLM
expert.
Instead, Babener recommends looking for companies that offer a
legitimate, fairly priced product and aren't afraid to buy back
your unsold inventory. When in doubt, remember who built the
pyramids: slaves!
7. Any deal involving a tax shelter. "The days of
the tax-motivated transaction are long gone," says Jan Krauss,
a CPA and business manager in Santa Monica, California. "In
days of yore, deals featuring anything from farm land to oil rigs
to low-rent housing offered immediate tax savings through
accelerated deductions greater than the cost of the investment. But
the IRS narrowed the loopholes in 1976 and effectively closed them
in 1986. Many taxpayers were badly burned."
Today, Krauss advises anyone approached with a purported tax
shelter to "make sure the deal has a real economic purpose,
independent of tax consequences." Also, get a good CPA or tax
attorney to vet the deal--in writing--before you sign on.
8. Any deal that comes to you through an unsolicited phone
call. Although there are plenty of honest telemarketers, the
FTC estimates illegal ones fleece the public for more than $40
billion annually. How can you tell the good from the bad and the
ugly? Among other things, the FTC's Telemarketing Sales Rules
prohibit telemarketers from calling you before 8 a.m. or after 9
p.m. and require that they immediately tell you what they're
selling before they pitch you.
Other warning signs include high-pressure sales tactics; refusal
to send written material; premature requests for your bank account
numbers, credit card numbers or other personal identification; and
requests for overnight delivery, including courier pickup, of your
check or money order. Be especially leery of prize promotions and
investment opportunities.
The next time you're suspicious about a call, turn the
tables with some tough questions: "Would you run all this by
my lawyer?" or "Which government agency can I contact to
check on your outfit?" The National Futures Association in
Chicago has a useful pamphlet called Investment Swindles: How
They Work and How to Avoid Them. The National Fraud Information
Center in Washington, DC, is another great resource.
9. Any deal involving a company whose accountants, bankers,
lawyers or insiders have quit. The reasons behind those
departures may tell you more than any financial statement or
prospectus. Professionals don't usually walk away from work
unless there's an ethical problem or they're not getting
paid (a red flag either way).
With high-profile companies, this information is often public
record; you'll find it in news stories, SEC filings and the
like. With smaller firms, the truth is harder to come by. If
you're lucky, key players may tip you off by jumping ship
mid-deal. If not, you'll need to ask those concerned
directly.
Insiders, even at the lower levels, often know where the bodies
are buried. Although professional ethics and the fear of lawsuits
may keep these people from talking, try them anyway. Work your
contacts, and look for clues in financial statements and other
documents. For instance, if you notice that a company's
financial statements are prepared by a different accounting firm
each year, watch out. Unless you can find out exactly what's
going on, look elsewhere.
10. Any deal that sounds too good to be true. Of course,
they usually are. Everyone wants to get rich quick. And some do.
But chances are it won't be you.
Remember, most wealth is accumulated over time through talent,
diligence and a little luck. So when that guy on the other side of
the deal promises you the moon and you can't figure out how,
don't ask "What's the catch?" Ask
"Where's the exit?"
Contact Sources
- Jeffrey Babener, c/o Babener & Associates, 121 S.W.
Morrison St., #1020, Portland, OR 97204, (503) 226-6600
- Jan Krauss, 2020 Pico Blvd., Santa Monica, CA 90405,
fax: (310) 450-6787
- National Fraud Information Center, (800) 876-7060
- National Futures Association, (800) 676-4632.
This article originally appeared in the November 1996 issue
of Entrepreneur magazine.