EXPLOITATION OF A TOP PERFORMER
Dr
Sing Kong Yuen, BVMS (Glasgow), MRCVS
31 October, 2010 |
 toapayohvets.com
Be Kind To Pets
Veterinary Education
Project 2010-0129 |
The following is my
advice to any person who wants to be a joint-venture
partner without putting down cash.
In this case study, I shall call this person Alan. In this private limited
company, there are 2 directors at 50:50 share. Alan
feels that he should be paid $5,000 per month as a
"salaried" director as he brings in the bacon.
The other director, Bernice puts in the money 100%.
So, Alan will get $60,000 per annum for the first year
of operation. Bernice does
not get paid but contributes in administration and
management of the staff and office. At the end of one
year, Alan wants 50% of the net profits but he will not
be responsible for any loss. He thinks that there will
never be losses since he has a wide network of
prospective and loyal clientele. Bernice is only a
"godmother" who pays for everything including his
"salary".
The important issue is that he wants to consider
$5,000/month to be classified under "operating manpower
expense". That means he gets $60,000 per annum for the
first year whether the company makes a profit or loses
money.
After deduction of this expense and other expenses like
salaries of supporting staff, office rental, utilities
and
miscellaneous expenses which may amount to around
$72,000 per year, the estimated "operating expenses"
will be $72,000 and with Alan's "salary", the total
will be
$132,000. Bernice does not get a cent for
that first year.
Therefore the total loss to the investing director for
this first year, will be around $132,000 in the worst
case scenario of losses.
Alan, the paid director projects "profits" based on his
extensive network of relevant clientele and your more
than 30 years specialising in the industry. He
brings in the bacon (as the clientele and expertise are
his initially), but he does not bear the financial
losses if the business fails.
There may be SARS virus
equivalent or long periods of haze when nobody travels, a regional war,
Singapore being attacked by terrorists. Money is needed
to keep the business going during such unforeseen times
and also to advance to him as the "directors' fees"
which he wants to considers as his "salary".
Now, if Alan is merely an employee of the
start up agency, the $5,000/month is classified
as "salary." If not, it is considered "director's
drawings".
Man proposes. God disposes. If the reader does not understand this
idiom, I clarify that there is no
sure thing as success in any start-up business. If there
is, why are there so many more employees than
self-employed?
With Alan's proposal to get $60,000 and 50%
of the net profits (if any) but not the losses, Alan is effectively taking
more than 50% of the net profits if the business makes
profits. He does not
take the losses and so he can just say goodbye and look for
another job by becoming another employee after one year.
I told Alan that his proposal is unfair and unacceptable to any
investor.
"Obviously, you have considered that Bernice, the investing director
doesn't deserve any monthly payment as she does not bring
in the bacon. Well, she does the necessary administrative
work saving time that permits you to do business
development and she is putting down the money where her
mouth is."
I elaborated: "Both directors in this 50:50 share holdings must be fair. When 2 people
start up, they put in money and their initial shares are
based on the monies they invested. They may pay
themselves a small salary or forgo salary. Certainly,
$5,000 a month is not the amount the start up will pay
the partner as that depletes the operating capital.
"Bernice also thinks she deserves $5,000/month
too as she bears more responsibilities being answerable
to the regulatory authority as the key executive
officer, her valuable time spent in administration and
in bringing some business (though Alan presumes he will be the only one doing it). The investing
director is also responsible for the family money
invested ($100,000 paid up capital). $100,000 is not a
small sum."
Alan said" "I can easily get a 80:20
deal with established agencies whereby I get
80% of the commission as a referring agent."
I replied: "Well, you should do what gives him the
highest financial benefit."
Alan did not like the idea of sowing his odds to various
agencies as he would not be able to project a solid
reputation.
Alan said: "My friend runs an agency himself. He
is given a salary and a share of the profits."
I said; "You can be sure that it will not be 50% of the
net profits in the general cases. Do check with him. If
he gets 50% of the net
profit and does not put his hands inside the till, he
must be a very lucky person."
I continued: "I doubt it. It is just not financially
viable for the investing partner to give such a big
share when he does not put up a dollar.
"A start up is like a baby. It needs a father and a
mother ideally. Obviously, a mother (in this case, Alan) can do it alone. Many single mothers
have raised children to be outstanding graduates. But we
hear of such success stories. Many more single mothers
have had failed miserably and we don't hear sad stories.
We don't want to hear sad stories."
 In conclusion, I spent much time elaborating the
realities of commercial business life to Alan. "You have
had been a very good employee for much of your life time
by being honest and able to deliver the sales without
the company getting into bad debts. Such employees are
in great demand but there is a limit to what most
agencies can afford to pay.
"See the other side of the coin. Business is
feast and famine. When there is feast, you, as an
employee feels
"exploited" as a top performing employee
bringing in 6 million dollars worth of sales income. You
don't
get to share the fruits of your big deals or get
"appreciated" by being given some percentage
of the revenue generated. But how much
of the crumbs will satisfy you?
"You feel
exploited as you feel you deserve high financial incentives
that the company should give you for generating the
six million dollars' revenue. You do not realise
that the net profits may be as little as 5% as there
are lots of overheads of a company. You feel that the
net profits from your sales are 15-20% but you don't
take into account the cost of overheads of the company
and other factors like depreciation.
"The company may give you some bonus but it can't be
lavish on you alone as there are the managing director,
the finance director, the accounts director and others
to pay. These are the supporting staff.
"A business
development person brings in the bacon but they do the
support. If the business development person gets
exceptional big bonuses out of his performance, what
about the supporting staff and the Chairman who invested
in the infrastructure of the business. Without his
investment, this person will not have been employed in
the first place. You contracted as an employee with an
agreed salary and you had been paid for that amount. Any
bonus would be up to the boss.
"When there is famine or office politics, you
seek other employers. This is also the reality of the
life of an employee. In a start up, you needs to
understand that you are no longer an employee and must get
rid
of your "exploitation" mindset.
"There will be no more exploitation of you by anybody because
you are your
own boss. Bernice does not give you targets since she knows that a start up is an uncertain business,
no matter how optimistic projections of past performance
you have made. If you are so
sure that the start up agency is going to be profitable,
why not sell your HDB apartment, rent one for the
family for the interim period and go all out guns
blazing. Sure to win. In no time, you have made millions."
In conclusion, I reminded Alan the harsh reality: "A start up is not a sure to win business.
Even a successful
business will have its ups and downs. There will be
economic recessions and Bernice has to
continue payment to tide over the bad times. This is the
other side of the coin that you, a long-serving honest
and productive employee cannot
understand as you have not suffered considerable losses of
a business set up and encounter stiff competition to lower
pricing and high demands for cheap and good services
from Singaporeans and elsewhere." |
|
|
|
To
make an appointment: e-mail
judy@toapayohvets.com
tel: +65 9668-6469, 6254-3326 |
toapayohvets.com
Be Kind To Pets
Veterinary Education
Project 2010-0129 |
|
|
 Toa
Payoh Vets
Clinical Research
|
|
|
Copyright ©
Asiahomes Internet
All rights reserved. Revised: October 31, 2010
Toa Payoh Vets
| |
