Entries Tagged 'People & Teams' ↓

How many times have you made payments/investments for promised results which never happened?

Well, I have made that mistake a few times over the last 2 decades, and each time, the learning has improved.  And the success rate of deals has also improved.

There are professionals of all types – who will ask for upfront money – and then you are stuck. It happens in every possible industry. It is very common and we see many cases regularly. And hence this post.

Whether it is a simple project, or a real estate, or a business, or anything else – if you are planning to spend money on it – please make sure that there is a payment schedule that is tied to milestones, mutually agreed between you and the other party.

Here’s an example of Milestone Based Payments – it ensures that the other party will continue to work for the results.

———————————

Novartis buys drug firm Protez for $400m 

ZURICH, 5 June 2008: Novartis has bought US-based Protez Pharmaceuticals in a deal worth up to $400 million, giving it rights to an antibiotic which could be used to fight superbugs such as MRSA, the Swiss drugmaker said.

“The acquisition of Protez Pharmaceuticals provides rights to PZ-601 and further strengthens specialty medicines development portfolio in hospital infections,” Novartis said. Z-601 is a novel broad-spectrum antibiotic in Phase II development against potentially deadly drug-resistant infections, including MRSA and ESBL strains, Novartis said.

Novartis will initially pay $100 million for privately held Protez, with a potential for up to $300 million of additional payments depending on the success of PZ-601, the company said. The emergence of hospital superbugs such as MRSA, which are resistant to existing medicines, has increased the need for alternative treatments and re-focused attention on antibiotics.

——————————

A point to note is that milestone based payments will result in a larger number for the total project cost/ business valuation – compared to upfront payment – but in my experience that extra is well worth the reduced risk, especially in transactions with strangers or new business partners.

Despite best effort, there are unknowns in the business environment which will come into play as time progresses – and Milestone Based Payments give you the ability to adapt better.

Best Wishes,
Shankar/ Director, Alpha Neuron

Just take a look at the following section – it’s from BBC website on Jan 20, 2002 – when the global economy was severely down, and almost every tech company was losing revenues and market value on a daily basis.

Profits plunge in 2001

Motorola slashes jobs Infineon chip slump Dell’s price war Ericsson shock Unisys profits halve Sony’s heavy losses Fujitsu slides into red Compaq losses mount Microsoft profits drop Nortel struggles Nokia sales fall IBM rare success Ad slump hits AOL Intel tumbles Bruised Apple Philips’ hefty losses Yahoo suffers Psion’s woe Palm sales halved Baltimore’s cash crunch Marconi battered Alcatel sheds staff Lucent losses widen Cisco slumps

As you will notice, all kinds of problem happened to leading tech companies in 2001-2002 – part of the reason was that they had built structures and teams very recently in 1999-2000 that were preparing for future growth – everyone was preparing – nobody wanted to be left behind – the problem being that the growth projections were just too steep. Some tech companies had planned 500-1000% increase in revenues in 2 years, and those were inflated business plans.

The situation was not very different from non-tech companies.

The question is: How does one prepare for such situations? What are the learnings from last time, which we can put into use the next time business slows down?

If you go through the above links, there are some lessons for every business owner and executive:

1. Consciously increase the Cash and Current Assets on your balance sheet from many months before you actually are in the middle of bad business season.

2. Watch your Debt/Equity, and take any possible steps to reduce the debt component, while the market is liquid.

3. If you have been thinking of selling off a business unit or a brand – because it’s not fitting with your long-term business strategy – decide Yes or No rapidly – and if it’s a Yes – then do it with top priority – otherwise it is very likely that you are losing valuation on it.

4. Outsource as much work as possible – preferably foreign countries – it helps to have business partners/vendors who are located in other markets – because they will have an incentive to help you get new business in case you are facing business slowdown in your home markets.