Again in 2018, we acquired Restaurant Furniture Plus, a B2B ecommerce enterprise that sells foodservice furnishings to eating places and different hospitality firms. We lately obtained a request for proposal from one of many most-recognized restaurant manufacturers on the planet. If secured, the challenge would have doubled our gross sales in a single day. We walked from the chance, which can sound foolish to you. However right here’s why.
Our Core Enterprise
First slightly background on our enterprise. So far, our core enterprise has revolved round two key issues. First, we’re advertising and marketing firm in the beginning. Which suggests we resell the merchandise of others and don’t sometimes participate in product design, manufacturing, importing or warehousing. And second, our common B2B transactions are sometimes within the $5K-$100K vary, bought most sometimes to up-and-coming chains which have but to construct in-house procurement departments just like the nationwide manufacturers. In no yr has any one in every of our prospects comprised greater than 10% of our gross sales.
The New Consumer Alternative
The proposal we obtained is summarized as follows. First, it was an enormous order for over 1,000 franchise areas of the chain, which meant it might have been an enormous multi-million greenback order, round 25x greater than every other order now we have ever closed. Second, it was a posh order that concerned customized manufacturing new designs precisely to the shoppers’ precise specs, the place the client required us to construct prototypes upfront at our personal value. And third, it was not a super contract, the place the client was not shopping for from us, their particular person franchisees have been (one after the other), and the contract included a ten yr product guarantee.
Why The Venture Measurement Was a Drawback
If we had closed this sale, sure, we might have cherished doubling our gross sales. However rapidly, we now have a buyer that comprised greater than 50% of our gross sales. Which is a extremely excessive focus of gross sales in a single buyer, particularly for the reason that nature of the transaction was a “one and performed” challenge. These gross sales would have evaporated within the following yr. So, as a substitute of displaying good development the next yr, we might more than likely have proven gross sales declining in that yr. Which was not an optic we needed to share with banks or different buyers down the highway.
And when you will have a consumer as giant as this one, it’s very easy for that challenge to turn into “all-consuming”, on the expense of all of our different long-term purchasers. We didn’t wish to threat mis-serving our loyal base of shoppers, by investing the overwhelming majority of our vitality into this one huge challenge. Which is what this challenge would have required.
Why the Complicated Product Was a Drawback
If we had been promoting “off the shelf” merchandise from our typical distributors, this challenge would have been a layup. There would have been no new product to design or warehouse. However the truth we would have liked to customized producer a selected answer meant we would have liked to go round $50,000 out of pocket to construct the required prototypes for the client to approve, as they might not fund prototype growth. To us, that was an enormous quantity to swallow with none assure of a sale on the backend. And this specific product needed to be manufactured with required elements solely accessible from one abroad producer, which might have made assembling the product with different U.S. or China based mostly elements a logistical problem.
Why the Contract Was a Drawback
This $5,000,000 challenge wasn’t going to be funded in a single examine from the client. It was coming in $5,000 at a time from 1,000 particular person world franchisees over the course of a yr. Which meant going out of pocket on round $3,500,000 price of stock day one to get the best-priced manufacturing phrases, with none monetary help or ensures from the client, after which, crossing our fingers all of the franchisees really purchase the product over time as they have been purported to.
Then, there was the problem of getting to ship the orders individually to five,000 areas throughout the globe; it wasn’t merely going to 1 buyer warehouse. So, the warehousing of the objects and the delivery logistics for heavy furnishings going abroad, would have definitely created its challenges, operationally and financially, as that was not a part of our core competency of promoting solely to U.S. based mostly prospects to this point.
And the ultimate deal breaker was the ten yr guarantee. What number of merchandise have you ever bought include a product guarantee of 10 years. And, this was for outside patio furnishings getting baked within the solar, and being utilized in a business setting the place issues may naturally go improper. The very last thing we would have liked, have been guarantee claims displaying up in years eight, 9 and ten, that might have bankrupted the corporate down the highway.
Why We Handed on the Alternative
So, as you’ll be able to see, there have been a variety of causes we determined to go on this chance. It could have been so tempting to shut the sale, and pat ourselves on the again for doubling gross sales. However the draw back dangers right here have been method too excessive to swallow: the upfront prototype prices, the upfront stock financing, the worldwide warehousing and logistics, the ten yr guarantee, and many others. have been all potential pitfalls that we have been unwilling to take that threat.
So, the lesson right here: watch out what you ask for, as a result of it could possibly be your undoing. Don’t get so romanced by the thought of driving revenues, that you simply don’t suppose by means of the operational or monetary challenges it will end in. Solely chunk off what you’ll be able to simply chew, in any other case your corporation will “choke”. Know what your core competencies are, and keep firmly targeted on what you are able to do greatest. It’s completely acceptable and prudent to say no to a sale, if there’s a excessive odds it’s going to find yourself capsizing your boat. For extra insights right here, make sure to learn this companion article: Pitfalls to Avoid When “Reeling in the Whale”.
George Deeb is a Associate at Red Rocket Ventures and writer of 101 Startup Lessons-An Entrepreneur’s Handbook. For future posts from George, please observe him right here or on Twitter at @georgedeeb or @redrocketvc.