After all these years in business, I am still amazed when I encounter a dishonest client. It is doubly confounding when the client is not only dishonest, but also inexperienced and unsophisticated in the intricacies of business. It is especially true when seeking equity funding or applying for debt. Recently I was retained by an agent for a start-up service business. The start-up business was a new venture from an experienced healthcare practitioner. The client intended to open its first location in North Carolina. On the surface, it looked to be a straightforward and quick project. The client needed third-party-prepared financial forecasts for his loan application. He said he had all the necessary data to develop the forecast. A fee was set and the project (intended to be done in less than 10 days) was underway.
I built the business model and gathered some preliminary data on the locations under consideration: salary and wage rates, lease and office upfit space, and other standard information.
Then I waited for the client to provide his specific assumptions about staffing, schedules, equipment needed, location, and so on. I had a model but couldn’t fill it with data. Emails were sent; phone calls were made. I still had no data. Finally the client agent and I connected with the client by phone for 10 minutes. He gave some general operating assumptions. He said he would quickly provide all the other needed information. Days passed. Nothing came.
The client decided to come to town, so we set up a working meeting. I had the model, my research on the leasing costs, benchmarked competitor rates, and other data related to assumptions. I also had extensive research that I had done to move things along related to operational hours, direct and indirect competition, etc. I was ready to get the financial model done … and the client arrived… to eat breakfast. Over breakfast, I quickly realized that the client had no clue as to what he needed in terms of equipment (my estimate for outfitting his space from ground zero was $500K). He had no location, not even the city selected. Software costs? No clue. Licensing and regulatory requirements? Nothing there either.
As I asked for information over the breakfast table, I realized that the client, while experienced in his profession, had left the running of his previous business to others. It grew organically and over the years other people made things happen as the regulatory, tax, and industry requirements evolved. He firmly believed his marketing consultant who stated, “from day 1 his practice would be at 100% capacity.” The client believed that he could get the business built from the ground up in less than six months. He held that belief even though he had no space, no equipment, no staff, no licenses to practice his profession in the state, and most importantly, no funding.
Actions and Words – Client Character
The most revealing comment about the character of this client came for me when he asked “Can’t you just make up what the banker wants to see?” No I can’t. You see I don’t do things that way. It isn’t ethical. I don’t make up financial information to get funding. I build financial models that reflect the reality of what a business plans to do. The plans reflect what resources are needed and enable lenders and investors to make informed decisions based on the what the management team believes will happen.
The financial models I build enable clients to understand what their assumptions and plans mean in dollars and cents. They spell out the time and resources required to reach breakeven and then profitability. If we can’t make the financials work, then I can’t in good conscience advise my clients to start businesses. It is especially important when they are under-capitalized and overly confident or ambitious in forecasting success.
Financial Model Integrity
Whenever you build financial models and business plans, you do so to enable organizations to succeed. These tools take the vision and assumptions of business founders and connect them to the reality of what it will cost to do business according to the plan. A financial model will enable a business to understand the start-up costs and the on-going costs of doing business. We are able to analyze various staffing plans to maximize service to customers and capacity to do business while managing the costs of labor. We can run scenarios on how changes in minimum wage and overtime regulations will impact costs. We can analyze what makes sense to buy and what should be leased.
Other People’s Money
Unfortunately, this particular client was looking for answers and an understanding of the local market. He didn’t want to know the true start-up costs. He didn’t want to know the most likely ramp up time. He wanted OPM (other people’s money) to start his business. He wasn’t concerned with putting in the work to validate his business model or assumptions. Both the client and the other consultant have been on extended European vacations for the past month. The client still has no location, equipment, or funding. Time is ticking away and his firm “open date” is now just over 90 days away.
Building Business Success
So to open a successful business, you have to be able to articulate what business your in. You need to know where you will operate. You need to spell out the your hours of operation, the equipment you need, the number and type of employees, etc. You need to be able to quantify the cost of those resources. This is especially important if you are seeking OPM – whether that is a loan from a bank or investors. The more realistic and concrete your analysis, the more likely you are to be properly capitalized. The more in-depth your analysis the more credibility you have with funders. You will also be able to have working capital while your business is getting up to speed.
In conclusion, if you want to succeed, you shouldn’t take shortcuts on the critical aspects of starting the business. Another lesson in this story is for service providers. When you get a referral to another service provider or a client, it doesn’t mean that the you should accept that business. Even trusted referral sources can make mistakes when they send business your way. And finally, the ultimate lesson is to hold firm to your integrity in all situations. Don’t compromise your principles for anyone and especially not for money.