How to avoid training a competitor
September 16, 2013 11:35 AM   Subscribe

My husband and I have a small business. It is beginning to do well so we are thinking of hiring a part-time commission-based sales person and even have a specific guy in mind. However, this makes us very nervous: the whole business is predicated on relationship-building within a rather small, tight-knit industry, coupled with not-commonly available knowledge of how certain things work. How do smart small businesses manage their salesforce without essentially providing paid training to a future competitor?

To be clear, it takes a lot of effort to break into the industry. Because of this, there isn't a whole lot of competition: over the past couple years, we've watched at least a dozen close competitors go out of business. The reason that we did not fold like the others is because I'd been making enough money to carry the household while my husband was out there hustling. So now that we are (finally!) seeing some decent profits and (finally!) getting too much business to handle on our own, we don't want to provide the same life-sustaining cash flow to a smart, entrepreneurial self-starter who will naturally - and who could blame them - want to take off on their own once they know the who and the how.

We realize that a non-compete is one way to handle it and we would appreciate any advice from small business owners who have experience with these and can offer specific pointers. (We are in Minnesota where non-competes are enforceable, with some reasonable caveats, but any personal experiences are welcome). However, we have very little faith in the formal legal process - we've been through the blood bath before so we know how mind-bogglingly expensive these things are even when you end up settling. Are there any business/human strategies that can help avoid these types of situations?

FWIW, we are both very much into "there is enough pie for everyone" philosophy but at the same time, we don't need to give our business away.
posted by rada to Work & Money (16 answers total) 4 users marked this as a favorite
 
Definitely talk to a lawyer. It's worth the money now to have a licensed MN attorney draw up an employment contract -- ask around for a referral to someone with a sliding scale or who would be willing to review something you put together on the cheap.

Trust me, it's 1000 times better to pay someone to do it right the first time than to pay someone down the road to patch together a contract that's not *quite* enforceable.
posted by mibo at 11:47 AM on September 16, 2013 [1 favorite]


I have found that golden handcuffs work better than a non-compete. I have no idea what commission rates you pay, so for this example I will use 40%. I would offer 50% with 10% vesting every six months and another 10% vesting every 15 months. So you would get paid 30% up front with 20% more paid out over time. If you are not there on the dates of vesting, you forfeit the payout. This gives them a better than standard payout and makes them stick around to get it. After 3 or 4 years, give them the option to convert to a straight 40% payout. Obviously the amounts and times are variable, but you want to at least get paid back for your training.
posted by JohnnyGunn at 11:48 AM on September 16, 2013 [9 favorites]


is it possible to divide the labor in such a manner that this one person won't learn ALL of of the trade, but rather a part of it?

or could you hire someone for the most time/labor intensive part and just have them do that one thing?
posted by raihan_ at 11:49 AM on September 16, 2013


It's probably futile to try to prevent someone from EVER going to a competitor or starting their own business, because people work for decades and also have external changes in their lives that sometimes require relocation, etc. So the first thing to do is to think about how much time you need out of someone in order for it to be worth your while training them. Three years? Five years?

Then you think about what you can do to get them to want to stay. To some degree this will probably depend on what the sales person is interested in doing, but some examples would be: increase to full-time, tiered commission (less commission while they're in training, higher commission but with vesting when they're fully independent, annual bonuses for hitting sales targets that are only available if you're still employed at bonus time). Some of retention is also based on enabling people to grow in their jobs--maybe as your business grows, you'll need a manager or a trainer. That will appeal to some people, and not to others.

You should definitely have a reasonable noncompete, but I agree that it shouldn't be your primary method of workforce retention--it's supposed to be just enough of a hassle to break away that the benefits of continued work for you outweigh the annoyance of challenging a noncompete agreement.
posted by The Elusive Architeuthis at 11:57 AM on September 16, 2013 [2 favorites]


Remember that a lot of qualified people will think very, very hard before signing a noncompete. I'd do it only for significant extra pay. One of the main reasons people work is so they can build experience and learn things that will help them make more money later.
posted by miyabo at 12:30 PM on September 16, 2013


I know this sounds crazy but could you possibly find someone who's only here on a temporary work visa?

Otherwise, yeah, it's really hard to watch someone you trained walk away with your business (or even part of it -- lots of clients are pleased to have more than one option, and will use the opportunity to make you scramble harder for their custom -- even clients that you are friendly with. After all, they're going to get friendly with the new guy too.) I've seen it up close and it's an extremely bitter pill to swallow. As you said, enforcing a noncompete can be problematically expensive in itself.
posted by fingersandtoes at 12:42 PM on September 16, 2013


There is no way to protect against this. Sorry, but it is true.

I have consulted with business that have had this same problem. After one of their best salespeople left and went to work for another company, they learned he was specifcally calling on their current customers (his ex-customers).

The lawyers said they were going to make an example of him, etc.

In the end, too expensive to litigate, and too hard to prove damages.

Work hard on the preventive end, choosing your employees wisely. Good luck.
posted by gnossos at 12:51 PM on September 16, 2013 [3 favorites]


One of the better ways to do this is to potentially look into bringing the person on as a partner or something in 5-10 years. Then they're invested in the success of the business and proving themselves and what not. Maybe something to consider if you're worried about them getting all the knowlege and then leaving. Have them get that knowledge and continue to work with you.
posted by Carillon at 1:03 PM on September 16, 2013


I work under a non-compete. If I were to quit tomorrow, I couldn't work in my industry for a year.

Which really isn't that long. So why do I stay and not plot to break off on my own?

1) I have zero ambition to own my own business. This would be a good "where do you see yourself in 5 years" kind of question to ask to help get a feel for where your potential employee wants to go.

2) They make it worth my time to stay: Full insurance and bonuses. They pay a living wage. They offer great vacation time. 401K. Etc.

3) They aren't monsters to work for. Usually.

I think if you temper finding a loyal candidate with what you can offer them, in addition to a non-compete, you will be just fine.

Also, is there any way you can add in that when you are ready to retire, they could have the option to buy the business from you?
posted by haplesschild at 1:04 PM on September 16, 2013 [4 favorites]


A couple of thoughts:

1) Not everyone wants to run a business. I read a story once where the business owner was trying to foster a path to independent business ownership for all employees and was shocked to learn that most of her employees were not like her. They had no such ambitions. They just wanted a steady paycheck.

So maybe do a little research and try to screen out personalities who would be inclined to start their own thing?

2) I don't really understand why you would hire a salesperson anyway. (You typically hire sales people to grow a business, not to service excess existing demand.) I would consider raising prices in order to increase profits and reduce demand without dealing with the very complicated headache of hiring and training an employee.
posted by Michele in California at 1:14 PM on September 16, 2013 [1 favorite]


I'd go with golden handcuffs *and* a non-compete. The non-competition agreement should be for a reasonable period, and only in the area you cover. Realistically, many people think they want to start their own business, and most never will, but no sense training someone for a competing company. If you pay a salesperson a combination of base salary plus a commission, they will have lots of incentive to stay.
posted by theora55 at 1:23 PM on September 16, 2013 [1 favorite]


I don't know if this would work for your business, but what about the idea of your husband being involved in every job the employee does. For example, if your business was plumbing, your employee would do most of the work on his jobs, but your husband would drop in at the start of every job. He'd meet with the clients, let them know that he's the owner and wants to make sure everyone is happy with their service, gives them a phone number or email or some way to contact him directly, and then makes sure they know to contact him first with any questions. This way, the client will associate their experience with the owner of the company, and will be less likely to associate it just with your employee This would also be good for the company, since if you can tell everyone that the owner is involved in every single project, they will respect that.

In addition to this, make the job have enough perks that the person wouldn't want to leave (assuming you find someone you want to be a long term employee). Lots of people don't want their own businesses, they just want a steady paycheck. Don't just assume that anyone who works for you will want to jump ship. Maybe give them an opportunity to become a partner later on if business grows enough, or some other form of responsibility that is greater than just doing their job. Definitely give them as many perks as you can which may not cost you much. If there's always a slow time during the year, give them some extra paid time off, or if you can trade business for perks (at a higher value), try finding perks that you can give to them (such as hotel vouchers, or gift cards to restaurants, etc.). I know at one of my jobs the owners would charge $100 for a job, but would also do the same work for a $150 gift card, which would actually cost the other business $75, so both parties came out ahead. This is what they gave out at Christmas time, and everyone loved it. The ability to work half days if the job gets done, tickets to sports games, stuff like that will make someone want to stick around.
posted by markblasco at 2:46 PM on September 16, 2013


It's my understanding that in some jurisdictions, a non-compete agreement may not stand up in a court because of right to work laws.

But in any case, in addition to whatever legal measures you take, I think your best bet is to hire someone who is going to want the stability of working for you and not want the risk of striking out on their own. So you can look at their personality, their financial situation, their family situation, how adept they are at multi-tasking, etc. and try to assess how likely you think the person is to want to start their own business in the future.
posted by Dansaman at 3:12 PM on September 16, 2013


When I look through C.V.s, I make a point of excluding people who have owned their own business. That's not to say they will never go on to screw us and take our connections and knowledge, but I feel like it excludes the most dangerous of potential employees.
posted by PorcineWithMe at 4:24 PM on September 16, 2013 [2 favorites]


Another thing you could do is withhold some vital piece of operational knowledge. In other words, don't let them know every aspect of your business to the point where they could do it all themselves.

I once worked for a company who refused to allow us (the team who developed the product) in meetings with clients to sell it to them. We were allowed to come up with the ideas but not to access clients because once we had the ideas and the client relationship, we had everything we needed to take the client and run. I resented the hell out of someone else selling my concepts in. My work partner never said much about it.

Six months after I left, he teamed up with two other people in the organisation who were account directors with client relationships, stole the company's six biggest clients and set up his own business. The original company collapsed. His is still going strong. As it turns out, my company's mistrust of its own staff was well placed.
posted by Jubey at 4:55 PM on September 16, 2013 [2 favorites]


In my experience, non-competes have mixed success. They work best when a) the list of competitors is short and b) you have the funds and the intent to go down the legal route. If you can't enforce it, a non-compete is just a piece of paper.

I would also add that pure commission-based sales is a not a way to build loyalty. Salespeople often talk the talk on big commissions but they want and need stable income too. If you push all the risk onto the salesperson - in effect they take a leap of faith that in giving up a stable income they'll make over and above on the commission selling your product and service - you'll get people who are more likely to chase deals (potentially at any cost) and who profile more towards risk taking. If you're looking for more of a business partner and someone you can trust with your brand I would strongly urge you incorporate some element of paid salary. It is an investment for a small business, but it's hard to get someone geared towards building relationships on your behalf when their remuneration is solely geared towards business winning.

It is never too early to have a CRM system. For a small monthly outlay you can have a system like Salesforce.com, which means your leads sit in your system and aren't in one big spreadsheet that can be taken and downloaded, or worse - you don't have access to your own pipeline because your salesperson takes it off system. Get a cloud-based CRM system and lock down downloads. Yes, you have a risk your salesperson can see all your clients and deal values but they'd probably find a way to do that anyway.

In terms of commission - work back from the on target earnings to your commission rate. Like JohnnyGunn, I would also build in a future component. However, in my opinion, spreading commissions out over a long period is only viable if what you are selling takes a long time to realise - in other words, you are basically using delayed commission either as a cash flow management technique or as insurance against misselling/the risk the deal goes bad. Don't use delayed commission as a means of enforcing loyalty. Commission is salary. If all is fair and square a salesperson has earned it and unless *you* aren't being paid the full service/product fee up front or you want insurance against clients not paying the full fee then there is no good reason to delay paying out.

In a small business your salesperson is going to be both the new business and the relationship management person. These are separate skills and lots of salespeople are better at one than the other. I've known account managers who struggle like hell to open up new business and I've known new business people who don't get how to manage an ongoing customer relationship. You should think carefully about commission rates for repeat business. Think about where you want your salesperson activity to go - your commission rates for repeat business should incentivise the relationship management but you want to pay out a lower rate for renewals and retain the higher rate for new business. How you balance the two depends on the nature of your business and the balance you want to strike in activity. Remember - where commission is the largest part of the take home pay, it drives activity.

Finally, on golden handcuffs - I'd talk early on about wanting to give employees a share in the business. You don't have to be specific, but you do have to mean it if you say it. That is golden handcuffs. From an engagement and loyalty perspective, being even a minority owner of a business is a different and valuable thing from just being well paid. If your salesperson works out, bring them into the fold gently. You don't have to show them all the secrets, but you do want them to feel like they are more than just another employee. The thing most likely to get to leave them once they are satisfied with pay is the feeling that you and your husband close ranks. Small business owners can be terrible at this - so protective of their business that they keep running their business 100% autocratically even as the business scales.
posted by MuffinMan at 12:27 AM on September 17, 2013 [2 favorites]


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