In this article we showcase some of the ways in which we help you to transform your business to become more profitable and successful.
Our client Fodman* is a food manufacturer with a profitable business, lots of work and plenty of business development ideas.
[*this case study is based on work we have done for various clients over time]
They know there are key areas where they are open to risks that could result in them:
- wasting time and effort to fix problems;
- having their processes and recipes used by third parties and losing their competitive edge as well as losing customers;
- having arguments with their partners;
- unexpectedly ending up in business with the family of their co-business owners.
They spend all of their time just running the business and are worried about what they would do if these risks eventuated.
How we fix this:
Identifying value Together with our client, we identified the most valuable elements of the business. We came up with a variety of forms of intellectual property: things like brands our client had developed for themselves; recipes and processes developed or refined for a customer’s brand; contacts and relationships with specialist suppliers, distributors, sales representatives; and knowhow developed over many years in the industry, partly shared with staff. We also identified the product of the combined skills and efforts of the directors as significantly adding value to the business.
Sources of risk and dealing with them Then we looked at sources of risk to valuable elements of the business. We came up with customers, suppliers, competitors, employees, and business owners.
Customer risk: Fodman expected to manufacture recipes developed for or with its customers and did not get adequately paid for this work separately from orders placed for product. A customer had manufactured a few batches developed in this way, then took the product to another supplier. Its agreement with customers was very basic and did not deal with this possibility – and nor did its pricing structure so it barely recovered its costs. Fodman’s knowledge that another producer would not meet its own standards did not give it enough comfort.
Reducing the risk, building strong trading relationships, avoiding disputes, building, leveraging and protecting value: Firstly, we explored Fodman’s pricing structure, and they introduced three levels of pricing: one in which they retained the recipe, a second in which their customer bought a limited exclusive right to use it; and a third in which they sold the recipe to their client outright.
Secondly, we prepared pro-forma agreements with customers that meant the expectations of both parties became clear, as did the consequences of default. Their customers responded well to the options, understanding properly what they were buying. They were comforted by knowing Fodman were aware of ownership issues and would not sell the same recipe to a potential competitor unless the agreement allowed for it.
Thirdly, Fodman identified some recipes and processes that could be used for different products, so they made sure to keep the right to do that without hurting their customer.
Supplier risk: Some suppliers had no terms of trade other than relating to payment. Others had no terms at all. Fodman was relying on relationship and supplier pride to deal with issues of freshness and shelf life; certainty of supply; and if they had to recall any product. A customer gained a contract to supply a major supermarket with all sorts of requirements including warranties and insurance obligations, so their risk was even greater, and their ability to gain new contracts was in doubt.
Supporting general business needs, reducing the risk, building relationships, protecting IP, avoiding disputes, building and protecting value: We prepared a pro forma supplier agreement that covered things that were important to Fodman and enabled it to keep its customer’s production contract by meeting the supermarket’s requirements. Fodman sat down with each of its suppliers and used the opportunity to develop and clarify eachother’s obligations and expectations in the relationship, making it a mutually beneficial improvement.
Competitor risk: Fodman’s practice was to only invest in protecting a brand once it was established in the market, leaving itself open to expensive and slow court action if someone infringed its IP rights.
Protecting IP, reducing the risk, protecting value: We registered trade marks in Australia and overseas in countries where Fodman intended to export. We charted who knew what about each product across the value stream (internally and externally), so Fodman could work out if it wanted to make any changes so there was less exposure to risk. We incorporated these protections into agreements with employees, suppliers and customers.
Employee risk: Fodman had no written employment agreements and knew this exposed them to the risk that their employees would go and set up for themselves or go to a competitor using confidential information and valuable IP to take customers away, with limited and more difficult recourse than necessary. Being aware of this possibility also undermined trust and could get in the way of a strong relationship and happy workplace.
Reducing the risk, protecting IP, avoiding disputes, protecting value: We prepared basic employee contracts with provisions dealing with protection of Fodman’s IP and confidential information, including recipes, processes and contacts and worked with them on simple policies that they could convey clearly to staff raising awareness and communication.
Succession risk: Fodman is a business owned by two family companies. The directors had no agreement between them and no wills. Both were married to people not involved in the business. If one of the directors died or became incapacitated, the other would be in a difficult position of having to do all of the work but share the profits, and possibly having to deal with a difficult co-director.
Reducing the risk, avoiding disputes, supporting general business and personal estate planning needs: We worked with the directors to put in place a shareholders’ agreement, that not only dealt with succession issues, but also day to day management issues such as the percentage of profits that should be used to pay down uneven directors’ loans and how much should be retained for working capital. Both directors made wills so that control of their family companies that owned the business was clear and there would be less trouble in dealing with company affairs in the case of a disaster.
If you would like help to become more profitable, successfully delivering products and services to Australian and overseas markets, please contact us.