The Employment Clinic:
By Lawrence Alter
Q: A reader asks, “About 6 months ago I lost my job as a manufacturing manager for a $30 million manufacturing firm. A close friend has now asked me to go to work for him. He just got funding to launch a medical device company that he’s been trying to get off the ground for two years. He promises a decent salary, great benefits, and a lot of future potential. It sounds very attractive. He is saying that this is a wonderful “ground floor” opportunity for me. Is it wise to work for a close friend and what are your recommendations?”
A: According to most reliable sources, 60% of all new businesses fail within three years, and 90% within six years. Although no one starts a business with the idea they might fail, the fact is, most do. So it is absolutely essential that your due diligence be done thoroughly. The lure of ground floor opportunities and dreams of ownership has sent many wishful thinkers back to the stark realities of unemployment. If you hope to make an objective decision, you need to look at any job offered by a friend from both business and personal vantage points. Getting answers to the following questions will help you to make more informed and financially prudent decisions regarding any start-up business, whether or not it is offered by a friend.
1. How much funding is the owner able to generate, how long is it expected to last, and does the company have access to additional financial resources if necessary – as it probably will be? A start up company should have funding for at least two years.
2. Who are the key players, what is their background, and are they qualified to perform their respective roles? How much income will they be drawing? In a start-up venture the owners should be receiving minimal salaries until revenue is being generated.
3. In the case of your friend, does he have any other source of income or is he relying strictly on income produced by the new business? That could spell danger.
4. Who is responsible for sales/marketing and what are their qualifications to generate new business? The life blood of any business is its new customers.
5. Does the company have any existing customers where the product has already been pre-sold?
6. How many employees does the company have? If they are overstaffed, funding could be depleted quickly, and if understaffed, you may wind up doing the work of two or three people.
7. Is your friend willing to making any salary or compensation guarantees and will they put them in writing?
8. What is the potential for bonus, or since this a ground floor opportunity, what is the possibility of some equity or stock options?
9. Did you meet with any of the other key people? Can you meet with the owner’s accountant and/or banker to see how they evaluate the company’s potential for success? Oh yes, and make sure you run a credit report on the owner – or ask him to provide a personal financial statement. If the credit is bad or he refuses to provide any information, you are running a huge risk for failure.
10. Regardless of your friendship, you should seek at least 3 or 4 personal and professional references that can speak to the talents and reputation of the business owner. Remember this is a business relationship – not a friendship relationship. A cardinal rule, business and friendship don’t mix.
11. Has the business owner any previous experience in running a business or has he always been an employee working for someone else? If the individual has no experience in running a business the chances for success in this new company are dubious.
12. You should ask to see a copy of their business and marketing plans. In a small business there should be no secrets.
13. If the company is engineering driven, the chances of success are slim to none. The world’s highest quality products still require an excellent marketing or sales driven program to be successful. The best ideas of entrepreneurs and the best new products often fail because of the lack of a good sales approach – or the ability of the owner to take the hard knocks until they have a steady stream of business.
14. All commitments should be in writing. An informal letter of agreement is not necessarily legally binding; it’s simply the professional way to do business. If you are going to be a key player, then you will want to investigate a contractual relationship – which is legally binding. Remember always, promises are not contracts.
Finally, our experience has shown that when business relationships are formed between family members or close friends, the chances for success are substantially diminished. The watchword is due diligence to minimize the chances for failure and then proceed with caution.
Author Lawrence Alter is president of L.D.A. Enterprises, Ltd.; a Minneapolis based outplacement and career management firm. He is a recognized expert in career growth techniques and former columnist for the St. Paul Pioneer Press. Send ideas or questions via email to: LDA@EmploymentClinic.com. Website address: www.EmploymentClinic. ©Copyright 2007 Lawrence Alter. All rights reserved.