Back in 2018, we acquired Restaurant Furniture Plus, a B2B ecommerce business that sells foodservice furniture to restaurants and other hospitality companies. We recently received a request for proposal from one of the most-recognized restaurant brands in the world. If secured, the project would have doubled our sales overnight. We walked from the opportunity, which may sound silly to you. But here’s why.
Our Core Business
First a little background on our business. To date, our core business has revolved around two key things. First, we are marketing company first and foremost. Which means we resell the products of others and don’t typically take part in product design, manufacturing, importing or warehousing. And second, our average B2B transactions are typically in the $ 5K-$ 100K range, sold most typically to up-and-coming chains that have yet to build in-house procurement departments like the national brands. In no year has any one of our customers comprised more than 10% of our sales.
The New Client Opportunity
The proposal we received is summarized as follows. First, it was a huge order for over 1,000 franchise locations of the chain, which meant it would have been a huge multi-million dollar order, around 25x bigger than any other order we have ever closed. Second, it was a complex order that involved custom manufacturing new designs exactly to the customers’ exact specifications, where the customer required us to build prototypes upfront at our own cost. And third, it was not an ideal contract, where the customer was not buying from us, their individual franchisees were (one at a time), and the contract included a 10 year product warranty.
Why The Project Size Was a Problem
If we had closed this sale, yes, we would have loved doubling our sales. But all of a sudden, we now have a customer that comprised more than 50% of our sales. Which is a really high concentration of sales in one customer, especially since the nature of the transaction was a “one and done” project. Those sales would have evaporated in the following year. So, instead of showing nice growth the following year, we would most likely have shown sales declining in that year. Which was not an optic we wanted to share with banks or other investors down the road.
And when you have a client as large as this one, it is really easy for that project to become “all-consuming”, at the expense of all of our other long-term clients. We didn’t want to risk mis-serving our loyal base of customers, by investing the vast majority of our energy into this one big project. Which is what this project would have required.
Why the Complex Product Was a Problem
If we had been selling “off the shelf” products from our typical vendors, this project would have been a layup. There would have been no new product to design or warehouse. But the fact we needed to custom manufacturer a specific solution meant we needed to go around $ 50,000 out of pocket to build the required prototypes for the customer to approve, as they would not fund prototype development. To us, that was a big number to swallow without any guarantee of a sale on the backend. And this particular product had to be manufactured with required components only available from one overseas manufacturer, which would have made assembling the product with other U.S. or China based components a logistical challenge.
Why the Contract Was a Problem
This $ 5,000,000 project wasn’t going to be funded in one check from the customer. It was coming in $ 5,000 at a time from 1,000 individual global franchisees over the course of a year. Which meant going out of pocket on around $ 3,500,000 worth of inventory day one to get the best-priced manufacturing terms, without any financial support or guarantees from the customer, and then, crossing our fingers all the franchisees actually buy the product over time as they were supposed to.
Then, there was the issue of having to send the orders individually to 5,000 locations across the globe; it wasn’t simply going to one customer warehouse. So, the warehousing of the items and the shipping logistics for heavy furniture going overseas, would have certainly created its challenges, operationally and financially, as that was not part of our core competency of selling only to U.S. based customers to date.
And the final deal breaker was the 10 year warranty. How many products have you purchased come with a product warranty of 10 years. And, this was for outdoor patio furniture getting baked in the sun, and being used in a commercial setting where things could naturally go wrong. The last thing we needed, were warranty claims showing up in years eight, nine and ten, that could have bankrupted the company down the road.
Why We Passed on the Opportunity
So, as you can see, there were a lot of reasons we decided to pass on this opportunity. It would have been so tempting to close the sale, and pat ourselves on the back for doubling sales. But the downside risks here were way too high to swallow: the upfront prototype costs, the upfront inventory financing, the global warehousing and logistics, the 10 year warranty, etc. were all potential pitfalls that we were unwilling to take that risk.
So, the lesson here: be careful what you ask for, because it could be your undoing. Don’t get so romanced by the idea of driving revenues, that you don’t think through the operational or financial challenges it is going to result in. Only bite off what you can easily chew, otherwise your business will “choke”. Know what your core competencies are, and stay firmly focused on what you can do best. It is perfectly acceptable and prudent to say no to a sale, if there is a high odds it will end up capsizing your boat. For more insights here, be sure to read this companion article: Pitfalls to Avoid When “Reeling in the Whale”.
George Deeb is a Partner at Red Rocket Ventures and author of 101 Startup Lessons-An Entrepreneur’s Handbook. For future posts from George, please follow him here or on Twitter at @georgedeeb or @redrocketvc.