My legal practice is a mix of business clients and entertainment clients, so I come across many people that are growing their endeavor from an early stage. That early stage is frequently a natural progression from a unique combination of passion, interest and skill toward (hopefully) a profession – a going concern – whether that is a business of some sort, or a successful film, writing or music career, or the like.
That transition into a “going concern” is incredibly difficult for many reasons, not the least of which is the difficulty many entrepreneurs find in demanding value for their skill, service or idea. Too often entrepreneurs treat their “it”, whatever it may be, not as a business, but as the uncompensated passion from which the “it” evolved.
In doing so, they hold themselves back – they stifle their own growth into a going concern.
Here are a few common pitfalls to avoid.
After reading these suggestions you can push back from these difficulties with a simple phrase – “I wish I could do that, but my lawyer says I can’t.” (Feel free to substitute “business manager”, “accountant” or “soothsayer” if it helps get the message across). Somehow blaming the bad news on a trusted advisor makes the refusal more palatable to them that’s hearing it.
1. Do not give “it” away – whatever “it” is. Whether you are producing a widget, selling a thing-a-ma-jig, or building a client base, it always seems that the intended customer wants it, initially, for free. Beware – and resist this as much as possible. Admittedly this may be the most difficult of these pitfalls to avoid. Every entrepreneur has to “give away” some of their time, advice, know how, product, samples, skills, etc., to prove to the world that they have something of value that should be paid for. Granted.
But as the old country wisdom goes, “why buy the cow if the milk’s for free?”
Resist the give-away. If what you are offering has value, require that its value be recognized. If a “free sample” has to be given, fine. Just keep it to a minimum, and be clear in your communication that very quickly the value must be recognized – and paid.
Anyone that expects otherwise is unreasonable – and should be passed by quickly and without regret.
2. Confirm that value in a clear writing – always. Early entrepreneurs often find it difficult insisting that an agreement be put in writing. They often feel that insisting on a writing shows distrust of the opposite party, and therefore may sour the new relationship.
That is looking at a written agreement from the wrong end. First and foremost, forming a written agreement is a process that makes the parties focus on the details of their intended arrangement – clarifies the deal and the details of the deal – so as to avoid misunderstandings later. Simply going through the process of discussing and committing to writing what each party intends will help avoid future misunderstandings and mistakes.
Focus on the who, what, when, where, why (sometimes), and how of the transaction. How will the performance unfold – multiple stages, milestones and approvals leading to the next stage? How will payment unfold – 1, 2, 3 or more installments as performance goes forward?
If you’re finding it difficult to put your understanding in writing, it may be that the transaction is unclear. But it must be. Otherwise the situation is an invitation to problems, disagreement and miscommunication – i.e. disappointment and mistrust by one or all.
3. Beware “friend” pricing . Much of an entrepreneur’s early success may come from friends, family or acquaintances - and that’s great and necessary. But with that comes the danger of giving a price or terms that are, frankly, unfair and unsustainable.
For example, quoting a price for a service that – without the friend even having requested a discount – is steeply discounted from the standard price. The person giving the quote just negotiated against himself because of the “guilt” of giving the friend a “standard” (and presumably fair) price – for example, quoting a $25,000 job for say, $18,000 – a $7,000 discount off the top – as a sort of favor. Albeit one that wasn’t even requested.
Try to think of that “friend discount” this way. What is the value of what you have to offer? And therefore, what is the discount off of the “standard” rate? (here $7,000).
Independent of this transaction, if you were to go to that friend and say, “Friend, would you do me the favor of giving me $7,000? Please? As a gift?” What would the answer most likely be?
But in underpricing the actual value of what you have to offer, you have volunteered to do exactly that.
I’m not suggesting you do not provide “friend” pricing – just be well aware of what you are doing when you do it. Make the decision consciously, and without the cloud of guilt merely because the potential new customer is a friend.
When they come to you as a customer or client, their role has shifted, and your judgment must shift to treating yourself and your business fairly.
4. Where is the business plan? Many new business owners dismiss the need for a business plan until someone demands one – a bank or potential investor.
That is certainly understandable. Business plans are tedious and time consuming to put together. No fun. And many people do not have a clear understanding of what a business plan is.
But more dauntingly, business plans require the fledgling business to focus on many scary and nebulous concepts: is there a demand for what I’m offering, is it enough of a demand on which to base a business (in other words, “what is my market”), what are my costs, my expenses, overhead, and therefore profits, and over a one, two, three or longer timeline (in other words, “projected profits/losses”), who are my competitors and can they respond to my presence, how much capital do I need, and how long before I am profitable, and therefore, can I last that long, etc.
But much like the process of forming a written agreement, one of the most beneficial functions of a business plan is in forcing the business to focus on all of the relevant factors. On what must be done, and known, to continue in business – and hopefully move to profitability.
These pitfalls are applicable to businesses and entertainment professionals alike.
The simple fact is that one must treat “it” like a business to become a professional.