Many become entrepreneurs to become their own boss. But the fact is that when you’re a business owner, you’re not your own boss; you work for your customer. Without customers, clients, contracts, etc., there’s no revenue and therefore, no business. But not all business is good business and there are circumstances in which a business owner should turn down revenue for the betterment of his or her enterprise.
Lawrence Gelburd, lecturer at The Wharton School, University of Pennsylvania, contributor to MSNBC’s “Your Business” and member of AOL’s Small Business Board of Directors, points out that small businesses have landed what appeared to be a dream contract only to see the costs to fulfill that contract bankrupt the firm. Gelburd the following rough guidelines to help entrepreneurs determine when to just say no.
If you can’t meet quality or timetable requirements. There’s a great temptation to take revenues and worry about the fulfillment later. “But if you’re not truly confident you can get the job done with the quality and timeframe that you need and your customer expects, as painful as it is to turn that money down, sometimes it’s the best thing to do,” says Gelburd.
If you can’t afford to deal with non-compliance. A contract may be a legal document, but the reality is if your company does not have the leverage to go to court and enforce a contract and all the appeals, time and energy it takes, it might not be worth pursuing. “If you can change the terms of the contract so you can get a down payment which is sufficient to cover the costs of contract fulfillment, you may not make money if the second half comes, but at least you’re not out of pocket,” Gelburd advises. “First time entrepreneurs often believe in the sanctity of the contract and often don’t see it as more of a roadmap.”
If the customer is controversial. It may have once sounded like a good idea to do business with Libya or Charlie Sheen (who once hawked Hanes underwear with NBA great Michael Jordan), but doing so now will likely cost you other clients. If some of your customers are very concerned about morals or ethics, they might be disappointed to learn you signed a contract with an adult entertainment company or a hard liquor distiller. “So you have to determine how the new client fits in with your portfolio of existing clients.”
Be wary when a customer is a very large portion of your revenues. “It’s not that you should necessarily turn it down, but once a customer is more than 25% of revenues, you should be a little uncomfortable and when it’s over 30% you should definitely be investigating the situation carefully,” suggests Gelburd. “I wouldn’t say you just turn it down, but not having a diversified revenue stream can be risky.” In this case, he suggests identifying a sub-contractor or partner to mitigate that exposure.
When ongoing support costs are undefined or too large. Sometimes clients will tack on requests for ongoing support after signing a contract. While this may sound minor, the costs can quickly add up. If you fulfill the requests, it cuts into the profitability of that contract, but if you don’t, you risk displeasing the customer. “The time to define all the ongoing support and costs is prior to signing the contract,” Gelburd says. “You can put in language that says if the support hours get above a certain number then the client will pay a certain amount.”