How to Elude the Pitfalls of Working on Contingency, Partnering, or on a Promise.

So you have been asked by a friend about working on contingency. These friends, acquaintances, or business owners want to work on building a business on contingency, meaning you are doing all this based on promises being made and you will only get paid when you generate income or reach certain milestones like landing new customers, closing deals, or such. Well, there are many pitfalls to this kind of business relationship that can end with lawsuits, lost friendships, or sadly even violence. The majority of these deals do not end well and you end up never getting paid for the work you put in. Being someone who loves a challenge and loves building businesses I have enough war stories to tell and a lot of great advice for you to lean on.

Contingency (noun) a future event or circumstance which is possible but cannot be predicted with certainty.

Here is a list of 10 areas of focus with things that if you put these in place, so after the excitement, hype, and bullshitting has faded and reality sets in, you will be on track to give it your best efforts and successful or not, you will be in a good place.

  1. Business Formation: Articles of incorporation. Set your business up, do it officially. If any party is not too concerned about doing this, here is your first red flag. When you work on contingency you want all parties to understand this is being done legally and with the ability to have legal recourse if things go south. Name your business and have a stated legal location. Form a joint escrow bank account that you have joint signatories on amounts over a certain number. Have an agreement on how much you will each deposit into that account to establish it and cover bank fees.
  2. Operating Agreement: Roles and responsibilities work in conjunction with the articles of incorporation to form the legal backbone of the business. The document, once signed by each member (owners), and make sure they get signed, acts as a binding set of rules for them to adhere to. The document is drafted to allow owners to govern the internal operations according to their own rules and specifications. Writing down, agreeing on, and amending these over time helps you understand who is responsible for what work activities and should alleviate some of the squabblings.
  3. Business Insurance: Make sure you are limiting your liability with the right business insurance. Do you need product liability insurance? Worker’s compensation, errors, and omissions? Consult with your agent and at least have the basics in place. If you are retailing products, most retailers are going to want you to have liability insurance in place. Also if one of the partners dies having insurance could limit your loss or provide a payment to you if the company cannot go forward with them.
  4. Financial Agreements: We all get involved with these contingency agreements for the pot of gold at the end of the rainbow. But it is easy to get blinded by the light in these situations and not have clearly defined financial agreements like how to split income? expenses, the value of sweat equity. You don’t want one partner saying he put in $10,000 while the other put in $15,000 worth of sweat equity but the cash donor see their input as more valuable. You can even prioritize returns based on an agreement so say someone fronted money for a product purchase, that could be paid back prior to the value of the sweat equity receiving a dividend. Have an agreement around the value of the work being done. A set schedule for an independent third-party accountant/bookkeeper to create regular dividend payouts based on the financial agreement you had. The cost of retaining someone to do the books is a critical cost you should all agree to fund before any other expense. You then have dates to work towards where you get something for the fruits of your labor. Most contingency agreements are not formed from scratch, they usually are connected to a business or idea that has tried and failed and needs business support, marketing, design, lead generation, or other work to be done. Think about it, without a third-party doing the accounting somebody would be in charge of handling the finances, who by default has not done a very good job of it to date and probably won’t going forward so get a third-party bookkeeper in place asap.
  5. Accounting and Audits: Your bookkeeper or accountant should also help you put together a ProForma, a margins worksheet, and other accounting worksheets based on sound financial information so you have clear sight-lines to the financial health of the business including forward-looking projections based on real historical and industry data. Never work without an idea from an independent third party about the potential of the business. Their skillset may help uncover financial issues that need to be taken care of before ever moving forward or identified and carved out of the new business for one of the partners to handle alone.
  6. Due Diligence of the Business: Get a clear understanding of why the business is where it is today. If you are dealing with being asked to come in and help grow an existing business you need to take a really close examination of how the business got to this stage. Is it in trouble? How much trouble? How much do they owe and to who? What assets do they have? Are they just struggling? why? Don’t accept vague answers from the owner and don’t ask shallow questions to make yourself feel good about it, ask hard questions, get to the heart of exactly why the business is not currently working. Is there financial impropriety, emotional and behavior issues, lack of business understanding, laziness, and lack of work ethic? Identify as many of these issues as possible before moving forward.
  7. A CEO or Owner Leading the Charge: The owner of the business should be the hardest working person on the team. If they are not working 12-15 hours a day to understand every aspect of their business and overseeing every issue in search of a solution then it is never going to succeed. The best CEOs I have worked for are the first in the office and the last out, they have a great understanding of all aspects of the business and want to understand all aspects. They want to be helpful but also ready to put professionals in charge of their area of expertise. Red flag if you are working harder than the business owner or CEO.
  8. Examine the Existing Customer Base: A business is only as healthy as those willing to pay money for your goods and services. If this is an existing business take a deep dive into the existing customer base. Break it down into Top 20 percent of accounts, the Middle 40%, and the bottom 40%. You need to have candid private conversations with the top 20% of customers to understand how they interact with the business, do they feel there is room for growth, what can the company do to serve them better, and are there any issues that need addressing. Finally are they happy and willing to continue a business relationship going forward? Then start planning your prospect targets. If this is a new business do an analysis of the competitive landscape and any market analysis available. These can give you a good head start in looking at your potential and identifying a target customer and prospect.
  9. Understanding What is the Value Proposition?: what makes what your business does special, how will you be able to compete and win? A lot of businesses fail because they do not have a value proposition that resonates with the customer and they shop somewhere else. Are your products a commodity? Are they priced correctly? Are your services costs competitive? Why your offerings and not your competition? What can you include that sets you apart from your competition? Are you faster, stronger, easier, what quantifiable adjectives can you apply that will resonate? If you can’t think of anything that sets your products and services apart, it is time for some real deep reflection.
  10. Business Plan: You have to have a business plan that you all agree on. Moving forward without one is a cardinal sin. The world of business is like a map that is always in flux, changing as the business environment affects it. So you need a roadmap to give you the best chance to be successful. This will also help you plan out a technology stack, sales & marketing alignment, funnel definitions, and dispositioning rules. It will give you a focus so the partners are all working on what you all feel are important to growing the business. You need to include in the plan annual Goals, is it a number like $1m in Sales, 50 New Tier 1 customers, or such. To reach these Goals they must be supported by Measurable Objectives, Strategies, and Tactics.

 Do your due diligence beyond the 10 steps above. I guarantee you this if you go into business and don’t take care of these items you will rue the day you skipped them.

Finally, You have to go into these relationships with 2 very important things that are reciprocal, TRUST, and RESPECT for each other, all the above becomes kind of pointless unless you have these. Good luck, work hard but more importantly work smart.