In This Economy, Everything's (Re)Negotiable
To ask for new terms on contracts, start when things are still manageable and avoid looking desperate.
Courtney Nicholas knows a thing or two about emergencies. FRSTeam, her $30 million fabric restoration franchise, helps homeowners and businesses clean up after fires, floods and other disasters. So when Nicholas saw an economic disaster in the making, it caused a few alarms to go off.
With two decades of experience in the business, the 40-year-old entrepreneur knew she couldn't afford to wait for things to get dire. She sat down and wrote to the landlords at five of FRSTeam's company-owned locations in California and Washington, alerting them to the situation.
"We basically said to them, 'We're OK, we're stable, but we think it's best to be conservative in this environment.' We didn't threaten them, we didn't even suggest any terms. We just left it open-ended: 'Is there anything you can do to work with us?'"
To Nicholas's surprise, three of the five letters resulted in rent reductions ranging from 10 percent to 15 percent. "When the first offer came in, I was thrilled. When three came in, I just couldn't believe it," she says. In exchange for the lower rent, landlords requested lease extensions of three months to one year--something Nicholas was happy to do because she didn't want to move anyway.
"It sure did help our bottom line to save a couple thousand dollars a month," she says. "That's money that enabled us to keep people employed."
The experiment was so successful that Nicholas is now recommending a similar approach to her 28 franchisees nationwide. She's not alone. Although there are no hard numbers, Alisa Harrison, a spokesperson for the International Franchise Association, says renegotiating leases is a top strategy for many members looking to cut costs and preserve cash flow. "At our convention, making it through the recession was topic No. 1," she says, "and renegotiating leases is a big part of that."
Leases, vendor contracts, bank loans--entrepreneurs are finding that in this economy, nothing is carved in stone. Terms agreed upon during good times can often be revisited to help get through the bad times.
Take recruiting, for instance. When the economy was hot, AWeber Communications, an e-mail marketing service, found it hard to find the talent needed to support its 51,000 customers. Like other growing businesses, the company resorted to high-priced recruiters to help fill its employment roster.
What a difference a year makes. With the economy bleeding jobs, founder and CEO Tom Kulzer, 31, discovered that "it's easier and easier to find people on our own. We don't have to spend as much time looking for candidates now, so the cost for recruiters doesn't seem justified."
Kulzer says he approached his recruiters with a simple cost-benefits analysis and managed to secure new terms that will cut his recruiting fees by 20 percent to 30 percent this year. The actual negotiation was surprisingly easy, he says. The tough part was "finding the gumption to make that phone call. It's always a difficult thing to ask people to lower rates that were previously agreed upon. But it comes down to simple economics."
An even more difficult call for many entrepreneurs is the one to their bankers. Worried that they might hurt their credit or their standing, business owners try to hide negative news until the last possible minute. But bankers say they'd prefer to get the call much earlier, when things are still manageable and terms can still be worked out.
"For a banker, all surprises tend to be bad surprises," says David Barnett, president and CEO of Pinnacle Bank of South Carolina. "Whether it's a cash squeeze or a drop in sales, come to us early. If a borrower is willing to work with us, we'll find a way to get them through it."
For a business owner who sees trouble ahead, Barnett says he can sometimes "help take pressure off the situation" by altering payment schedules or offering an interest-only option. "It might very well be in our best interests to modify the agreement for the short term, say six months to a year," he says, freeing up more cash for payroll, marketing and other expenses.
"The best thing we can do is keep that entrepreneur afloat. If the customer walks away, then we all lose."
Back at FRSTeam, Nicholas is working hard to ensure her company is never in that position. Bolstered by her success in renegotiating leases, Nicholas has approached vendors ranging from IT consultants to chemical suppliers, asking how they might work together to cut costs.
"We're building a relationship and looking for a long-term business partner," she says. "When things turn around, I'll remember the ones who helped us out, and we'll try to stick with them as long as possible."
In the meantime, she says, "Everything is negotiable, so I won't be afraid to ask. It's about survival, and we'll do whatever we need to do to stay strong right now."