Collecting From Deadbeat Clients

If you ever need to go to war over not being paid, David has some bombs you can lob over your enemy’s front lines.

Transcript

Blair Enns: David, we recently did an episode on Firing Clients and now it's like how to collect money from the clients we've fired. Is that what we we're talking about today?

David C. Baker: Oh, before you fire them, make sure you get paid.

Blair: Maybe we should collect before we fire them. It seems we did it out of order. That's be [unintelligible 00:00:32] some often and then let's make sure they give us their money. Let's set the order aside. We're talking about collecting money from deadbeat clients. This is a in case of emergency break glass episode or is there some preventative medicine that we're going to talk about?

David: A little preventative medicine. I think we probably talked about quite a bit of that in our previous episode about how to fire clients. Our topics have decided they taken a fairly evil turn recently. Fire clients, collect money from [unintelligible 00:01:00] This feels really cathartic to me because most of my life, I'm trying to be a good human. Somebody keeps cutting me off in a conversation and I feel, I don't know, minimized or somebody misunderstood me that I'm just trying to hold down the inner rage.

Blair: Are we talking about our relationship here?

David: A little bit.

Blair: I'm sorry. I cut you off. Go on.

David: We're trying to be a good human but this is one of those times when you can just let loose. All of the armaments, the firearms you've been polishing that you just know you shouldn't use. Well, there's no bridges left to burn here. These are jerks. They owe you money. You know they owe you money. The gloves are off. This is when you can be the kind of person you've always wanted to be.

Blair: We're going to war and you can unleash your evilness.

David: Yes, exactly. Then this feels so liberating.

Blair: I'm looking at your notes here and I thought, oh, my God, you have unleashed the evil, David, on this one and I imagine you had a lot of fun making these notes. Let's get into this. Your starting point is why we have to do this. One of the reasons is some people are just evil.

David: Yes, they're just evil and they've always been evil and you didn't discover it until it's too late.

Blair: Now, David, are you committing the fundamental attribution error here? Are you describing to peoples?

David: Don't throw our episodes back in my face.

Blair: We've all seen good people act in evil ways because something has changed in their contexts. Your point is that sometimes we're in situations where people, for whatever reason, they're deciding they're going to throw you under the bus. They're going to try to effectively steal money from you or not pay you money that they legitimately owe you.

David: They've done this multiple times and gotten away with it. You just say, okay, this is not just about the money, this is a contest now and I'm going to see if I can break that cycle. I'm going to see if they're going to now moving forward be afraid of stiffing people like me.

Blair: I cannot wait to hear the guidance you have for us. You've got a note here about your thought process was fragile. Can you explain this?

David: The way we entered the whole sales conversation to me, when I'm listening to the person who's selling on the agency side, I often remarked to myself, "Wow, they think this is really fragile. They think if they say the wrong word or they don't follow up at the right time or they misunderstand something that it's just going to get killed the whole thing." That level of nervousness seems to rise the closer we get to the end of the process. You're not talking about terms at the beginning, that's the stuff you talk about at the end. We skip over it because, oh, we've gotten so close. We're about ready to drag it over the finish line.

Let's not talk about something that could kill it. We view all this as fragile and we step back from what we should really do. I just don't believe that effective sales is all that fragile. This is a reminder. If you think it's fragile, you're not going to listen to me here but if you don't think it's fragile, then it's to talk about this stuff. Part of what I'm saying is, listen, you don't even need to worry about collection if you're a little bit more careful at the beginning and don't believe it's so fragile. You're the sales expert. How do you hear what I just sadi about fragile?

Blair: I concur and part of the fragility comes from over-investing in the sale. In particular emotionally investing. You're emotionally over-invested but also, in time and money. If you're so invested loss aversion kicks in. You're just worried about losing it so you will concede these seemingly small things late in the deal. If you're dealing with a procurement department, they sense this, they know this, they're going to drag it out.

They're going to try to increase your nervousness and they keep asking for things and if you keep giving concessions then you're setting up the conditions for this problem down the road. If they do decide not to pay you, you've done so many things poorly that you don't have many cards left to play.

David: Isn't it crazy to think about how, on the other side of the table, you have the people that appreciate you and want to work with you and so on. They have this professionally trained team that is organized around the central idea of reducing costs. Here you are untrained and you go in and face them. Maybe you should get some training around that. [chuckles] That's a sale for you. How do you like how I just did that?

Blair: winwithoutpitching.com people.

[laughter]

David: Or something changed on the client-side and you're the fall guy. This isn't evil intent it's just that you kept things at an oral level instead of a written level. Then the person takes the fall for something and takes you with them or they leave, or in one case, the client of mine their contact just died unexpectedly. All of this stuff hadn't been put in writing yet and they just got screwed.

Blair: We find ourselves in these situations where we have to go to war, just to recap what you said it here. Some of the reasons are we're dealing with shitty human beings. Sometimes it's we were too tentative scared to ask for basic business practices terms, et cetera, in the beginning so the fault's really on us. Sometimes it's just neither those two things. Something's changed on the other end, but usually tied to that is a lack of documentation on our part. Is that right?

David: Right.

Blair: Then you've got some general guidance we'll move through this part quickly and we'll get to the specifics of the tactics of going to war, but some general guidance on avoiding the situation.

David: Because in many cases the collection problems are related to a project that was either sold or was delayed. You need to anticipate that. Just say, what's going to happen if progress stops, but the project stays active? Some firms have some monthly fee that continues, or there's a very clear path if they decide to cancel. I'm just saying, legal agreements are intended to be as complete as possible to address those eventualities.

If you're looking for holes in your agreements it's almost always going to be around a dormant or a canceled project. Make sure those are addressed. The other really big one, this is a little bit obvious, maybe too obvious to say, but you're only trying to collect money you don't have. There's the big dust statement of the year. If your terms are such that you're never out too far ahead of your skis, so you're never owed that much money, then it limits how much you can be hurt as well.

Blair: I don't think that's too obvious to state. In fact, when I read your note I thought, oh, yes, that's something hadn't occurred to me. Don't be in this position, to begin with by accepting these unfavorable terms. What about situations when there is a contracted amount and the client kills the project? There's two elements here. We're not going to pay you what you think we owe you for the work that's already been done and we're not going to pay you the remaining monies that you had counted on for the final completion of this project, which isn't done.

David: That's really rare, fortunately. Usually, when that's true, there's been some massive personality break between the two sides, or we really are talking with an incompetent provider. You and I would probably be on the side of the client at that point.

Blair: Yes. Okay. Let's get into the meat of this, which is the specific guidance you have for people on going to war. David, would you kindly read to our listener, the title of this section that you wrote?

David: Specific bombs to lob over the enemy's front lines.

Blair: Make no mistake, dear listener, we are going to war, and these are the specific bombs to lob over the enemy's frontlines when you find yourself in this situation of having to collect. You've got this great and lengthy list, where do you want to start?

David: Yes, there's 11 ideas and these are just things that I've picked up in the trenches just from a client saying, "Hey, can you help us with this?" A client recounting to me the situation they were in and how they solved it or me sitting down with attorneys and tried to think through this.

Blair: Can you give us some context like how many times have you found yourself in a converse like this giving guidance on collecting money?

David: I think it's rare now that it ever has been, I was trying to think of a percentage. It would really surprise me if we have a collection issue with more than 1% or 2% of our revenue. I wish we had more issues with collections. You're just laughing at me. I just don't think we're pressing the envelope enough. I think a sign of pressing the envelope more would be more fights over collection. I wish there were more, but at the moment it seems like most business practices are wrapped up pretty well. We've gotten more sophisticated. They've gotten more sophisticated. It's still pretty rare, but it's one of those rare things where just let my mind go. If I had a really great enemy, what would I do? It's a cathartic episode even if it's not all that common.

Blair: Do you have a sense in all the work that you've done, how common bad debt is, what percentage of total income, et cetera, it gets written off at bad debt in a typical agency?

David: I think it's typically less than 1% or 2% across the board, but you'll find segments where it's much higher. If, for instance, you work more with startups. Especially if there's some VC or PE funding where there's somebody behind the scenes wielding an ax, or if the segment that you're working with is with founders who're spending their own money and then they get cold feet. I don't think it's a big problem across the whole industry, but there are segments of it where it's still a problem.

Blair: All right, let's go to war, what's tactic number one?

David: We'll recognize ownership of the ideas. It's one thing to fight over whether they like your work, whether they want to pay you, but if they are using work that they have not paid for, that throws it into a different legal category where we're talking about. It's not expressed exactly like this, but essentially, it's theft of IP. If they don't like your work and they're not using it, that's a very different discussion than if they don't like your work or don't like your prices, but they're still using it.

You have a lot more weapons in your arsenal here to fight them if they are using your work and haven't paid for it. I'm just wanting people to recognize that there is an IP issue, and not just a collection issue in some cases if your client is using it.

Blair: Neither you nor I are lawyers and so this should not be taken as strict legal advice consult your own lawyer. In the standard contracts, in creative firms, there's a statement about the IP does not transfer until we've been paid in full. Something to that effect, is that right?

David: Right. This doesn't happen as much now, but 10 years ago, part of what you did for the client was to build a web presence and they haven't paid you and you control the DNS record. Can you just turn it off? In some ways, you can, you got to avoid like tortures interference sort of a claim, but like you said, I'm not an attorney, you're not an attorney. It is a different argument if they're using your work and not paying you so just be aware of that. That's the first one.

Blair: Point number one, full payment equals full ownership. What's next on our list of tactics?

David: This is one I'll bet hardly anybody knows about and it's really fun to play with. I've done it four or five times on behalf of clients, and that's an enforcing an involuntary bankruptcy.

Blair: We really are going to war here. [laughs]

David: We are, yes, because you're never really forcing it. You're just threatening to force it and this is a distinctly US. What's striking about it is how easy it is, how low the threshold is. If three or more vendors together, these have to be unsecured vendors, are together owed $10,000 or more, it's a very small amount, at least three of you can get together and force an involuntary bankruptcy. Now it's not going to happen because they're just going to pay you off.

That's so much easier than dealing with an involuntary bankruptcy. It's a really interesting element of corporate law that not many people know about. It's a fantastic little thing to put in the back of your pocket because chances are you're owed quite a bit more than that and you can't force it on your own. What you have to do is say to yourself, is it likely that these people are screwing somebody else too. Let's go find those people, and then let's band together and do it. Seldom used, but very effective way to collect money.

Blair: You've done this a couple of times?

David: Oh, yes. Four times I think.

Blair: The client always ends up paying, I imagine?

David: Yes or there's a settlement, but you get their attention at this point. I don't think most firms know that they can be forced into involuntary bankruptcy. It's a pretty cool tool.

Blair: Wow. How are you going to top that one, what's next?

David: [chuckles] Yes. Well, in many cases, there's some intermediary. It could have been the referral source, the person who introduced you to this prospect who became a client, or it could be just you operate in certain circles. What you want to do is it's not motivated by evil. You're actually having a candid conversation with this person who knows both of you and says, "Hey, listen, I don't know what to do with this. Maybe there's just a misunderstanding. We can't get anybody to act on this. You've always talked highly about them. Our experience is that they owe us a bunch of money and we can't get it and I'm not sure. Have you heard anything that we should know about this?"

That's a very honest question and you want to know the answer to it, but what's going to happen is that that's going to filter back to the client. They're going to realize that, oh, that client is not just burning a bridge with you, they're burning a bridge with other people that up until this point held them in high regard. It's a very soft thing that's very relationship-oriented. It has to be done very carefully but it's very worth pursuing if you're in a situation where there are some people who aren't them, and that client needs that person, that party to think highly of them too.

Blair: As you say, it's an honest question somewhat deviously posed, which I like.

David: Yes, right. Like all passive-aggressive statements in the history of mankind.

[laughter]

Blair: All right, continuing with our passive-aggressive guide to collecting money from deadbeat clients.

David: This is turning me loose.

Blair: We get to see the real David Baker's brain.

David: [laughs] This next one is using the force of PR as a threat. Obviously, you have to be very careful about how far across that line you're willing to go but there are some categories of clients where publicity is a big part of their business plan, they are on a high growth curve, and it is a little bit fragile to them. The last thing they want leaking out, the last thing WeWork wants to hear is that the owner is smoking pot on a golf stream on the way to Israel, and then having all kinds of parties.

That's the kind of stuff that gets out, it can undermine the process of going public or raising Series C funding or whatever it is. This is a scorched earth policy. You got to be super careful with this, and you don't want to bluff too much. Once you exercise it, then it's over. They're not going to compromise at all. This only works if it's a real threat that you're willing to deliver, but haven't yet and that's just dangling bad PR as a foil for they're going public or raising more money or getting the blessing of some advocacy group or whatever that is.

Blair: Yes, you could be a little bit delicate about it, or probably not, just go direct, because as you say, this is a tactic of last resort. It's scorched earth. You might as well just say it, "Nice business you got here, be a shame if anything happened to it."

[laughter]

David: Now I'm pulling you, dragging you down with me, this is great.

Blair: All right, what else?

David: Save any evidence that they're happy with your work. The easy argument for the client to hide behind is that the quality of your work isn't good enough, you haven't earned the contract so you shouldn't be paid. Your only counter to that is specific signals. Ideally, it's in an email but sometimes it's your very clear recollection that you've written down after a meeting and then passed along to somebody. Those are the kinds of pieces of evidence that really help you to dispute the idea that your work isn't good enough.

It's exactly the same thing that a wrongful dismissal suit is built around where an employee is dismissed for cause and then they pull out their last employee review, which is a fuse of about how good they are. The two just don't fit. You can't say, "I'm going to fire you because you're not doing your job when just six weeks ago, you said you were and nothing really has changed." It's the same idea.

Save those comments that indicate their approval of this stage or how happy they are or how they showed it to somebody else and how good it was. It's just a little thing and these things aren't arranged in the order. It's one of the first things that attorney is going to ask for if you go that far and are seeking representation from an attorney. What's the evidence that they're happy with the work?

Blair: I imagine proof number one would be they're using it, proof number two would be they provide that evidence in writing so you hold on to that. Then proof number three would be they provide it orally and then you document it as soon as it happens. You send an email to your team, "Hey, just got off the phone with so and so, they love the work, et cetera." Or you make a note somewhere, but if you were to make that note and share it with your team, again, I'm not a lawyer, but I would imagine that's more cementing of that evidence. What else have we got in our toolkit here?

David: Well, this one's a little crazy and it would only work in certain cases. Let's say that there's somebody who wants to start up a new beauty brand. They used to work at a big beauty brand, for P&G or something and they launch on their own and they've got a little bit of investment money and turns out a little flaky and they owe you a bunch of money. This wouldn't work in a big setting. This only works in a setting like that.

What you do is say, "Okay, you're tired of me hounding you for money. I'm tired of it too, just frankly. Let's just do this. Let's have a payment plan. You go ahead and postdate checks. Write me a check now for November 1st and then for December 1st and then January 1st, and then I won't bug you, you'll have time to get the money and I'll just cash them."

What you're doing, they don't realize this is that you're changing this into a different category because now you're going to cash the check, whether it can be covered or not at that point. Now, they've written a bad check and that throws it into a very different legal category. It's a little bit related to a later one here, but this only works with individual deadbeats that aren't terribly smart, but it's a pretty interesting way to do it.

Blair: You call it a financial crime. It is a crime in the United States to knowingly write a post-dated check where you kow the funds are not there.

David: Definitely.

Blair: Now, our listeners in Europe, EMEA, Asia Pacific are asking what the hell is a check? Who you to check. You and I were joking before we recorded about how America's leading again.

David: We're still writing checks.

Blair: On some unrelated issue, just a little friendly Canadian American banter, it's like, well, we're with you. We still have checks. We're still writing checks. It's ridiculous, but so again, this is north American-specific advice.

David: This next one is a little bit related to that because you have to do them together and that's to just quit thinking about a receivable. When you're thinking about collection efforts, you're always thinking AR. You've done the work, they owe you money. Well, as long as it's an AR and absent other really strong evidence, there can always be the claim that you didn't do what you said. We're a soft industry, right? We're not delivering products. We're not delivering 17 products that all look the same. There is some confusion about what we're doing and when we've delivered it completely and so on.

You're talking about AR and there's always this possible question. Well, you haven't done a good job or you haven't finished or whatever. The idea is to reframe the argument and turn it away from an AR into a loan. The person on the other side of this would have no incentive for this unless you were going to either relax the terms or relax the price or both. What you do, instead, you appear easy. Again, I'm being evil, I'll admit it. You're appearing easy on them and say, okay, you don't have the money, I can't get blood out of a rock. Let's ease this tension.

I'm going to give you a discount and I'm going to give you time. Let's just put it in writing and then we'll be fine. What's happening though is once it's put into that arrangement, you can't question whether the person's done it. You're affirming the obligation by putting it into a loan and so you convert it from AR to a loan and it works great. Now, again, this is not going to happen with a big company, but you're not going to get stiffed by big companies very often either.

Blair: That is a little bit evil in that. You're playing nice, but you're changing the legal contexts to be more in your favor. What else?

David: Another one would be similar, but you would give some concession and exchanging it somehow for a personal guarantee. I talked about forcing an involuntary bankruptcy, which would typically be of some corporate entity in the US we're talking about us C or an S or an LLC, or maybe even a partnership. Here, we're talking about an individual who may owe you money and you can say, all right, I'll relax and it's not going to be a very sophisticated client that would fall for this one. I've seen it happen twice where they personally guarantee it in exchange for maybe half of the money or something like that.

Now, the only way for them to get out of that, ultimately, would be personal bankruptcy and nobody wants to do that. The real truth though is that you file some sort of a claim, a lawsuit they're going to have 30 or 45 days to answer it. Then there'll be all the discovery and other 90 days, and then maybe you'll get a judgment. Maybe it'll be a default judgment, which means they didn't really fight it. The court just said, yeah, you're right. That doesn't really help you. You still don't have any money. You still got to get the money. In some ways, some of these things are just purely punitive.

Others are, now, we're going to get some money from this. You have to decide how far you want to go and I'm going to back all the way off of this stuff at the end of this list. This is just one of those other things that if you find a fairly unsophisticated client, who's willing to give you a personal guarantee by God take it. It gives you so much more leverage. It's now not an unsecured obligation. It's not secured with assets, it's secured with somebody's personal guarantee.

Blair: It's definitely more meaningful to the client.

David: Yes, right. Another idea is just to hire an attorney or a collection agency. I'm not a big believer in the collection agency thing. They're not going to take individual cases. They only take big baskets of cases where they're just playing the odds. I don't think that's usually worth pursuing but an attorney might. They're usually not going to take something like this on contingency. They're going to want you to pay them. You got to decide you want to go down this path. You want to increase the risk of losing by paying. It's going to be a $10,000 retainer or you can find some attorneys that for a 1000 bucks they'll write a letter and maybe that would scare the person enough, I don't know.

I think in the last 10 years this kind of thing's only happened to be once and I was on the other side of it. There was a company that was going to do a survey of the property and they only did 40% of it and wouldn't come finish it. Now they're still sending me a bill four years later. I just write something nasty on it every month and send it back to them. It's like, bring it on. Nothing that I would love more.

Blair: You're enjoying it. When I was a teenager, I had a friend whose mother worked at a collection agency and she used to tell us stories of her tactics. I was scarred for years. I thought never want a person like this calling me saying the things that she would say to people. It was brutal.

David: Right about their kids, losing their kids and they know all of these tricks. It's a different world because we're talking about an individual who will lose their car and they can't go to work but a lot of the principles are pretty similar.

David: This is where it's tough because you want to do everything you can to keep it out of a legal setting. It's just nobody loses there. It's slow and expensive and it just takes headspace from you that-

Blair: Nobody wins there I think is your point.

David: Right. There are times when because most businesses not in the locale where you are, most of it is across state lines, maybe even country lines, and whoever files that suit first has a massive advantage because unless there's a venue change granted, then they have to hire an attorney to respond to your suit and they have to hire a local attorney and it's going to follow whatever the laws are in the venue you've chosen.

There are times when it really makes sense for you to venue shop and just file a quick suit and then, of course, there's going to be a settlement after that, there almost always is. Then you just reverse that and it's all done and you move on and you try to learn from it. There are times when it does make sense to file a suit.

Blair: You've got one more thing on your list here. it is not the tactic of Las resort

David: Grant a big discount in exchange for full payment right now you got to make it super clear that this is a one-time offer that expires at midnight Friday and we're going to go after the whole thing unless we get that. Backing off of all of this stuff ending is it's been fun to be legally angry here for 20 minutes but it's just not fun and it's not usually productive.

When a deadly client owes you money, sometimes it's useful to do just for the therapeutic effects of going to war. Most of the time the lesson should not be, "How do I collect this money?" The lesson should be, "How do I let this never happen to me again?" That's the primary lesson to move on because you don't hire an attorney just for their knowledge, which is substantial. You're hiring them to shield you from the emotional trauma of this kind of a constant ongoing dispute. They can't shield you from all of it. You still have to be involved.

I just don't think it's all that useful unless you're one of those rare humans that can kind of separate that stuff and have this dispute over here and not let it affect you psychically. I don't know if that's possible. I'm not very good at that. Normally, you just want to say, ah, shoot, this is my fault for getting us into this. How do we not make this happen again? Then if you just need me therapy sue them, but don't have high expectations.

Blair: There are times when it makes sense to put ahead on a pike. Let's have a public execution. Let's send a message to whomever it is, the client, your other clients, the marketplace, your suppliers, your team, whatever it is, sometimes a message needs to be sent and it's time for a head on a pike but with the exception of those, I would say, rare moments. You're probably better off just using this negative energy to make sure that you are never in this position again.

David: What have people learned about us personally today?

Blair: Well, not much new about me but we have got me deep insight into you and what keeps you up at night? I think shortly after I met you, I said "David if there's ever a war I'm on your side."

[laughter]

David: Whatever side we're on I want to be with you, Blair.

Blair: This has been illuminating. We'll let you go spend time with a therapist now to get you back to a more balanced state of mind. I'll just reiterate again here. we're talking about collecting from deadbeat clients. There's all this work that you can do to make sure you're not in this situation but when you're in this situation you just ask yourself, "Am I prepared to go to war?" Some of these are wartime tactics.

Some of them are maybe cold war tactics that you'd be more comfortable with and just ask yourself, how far am I willing to go on? Is this just spite talking? Is this just emotions or am I better off letting it go and using this negative energy to find the resolve to never put myself in this situation again.

David: Good summary. We could have just done that and we could have saved people a lot of time.

Blair: We wouldn't have sold as nearly as many commercials. We don't have commercials.

David: This is an episode everybody's not going to want to listen to this whole thing, but they're going to remember we did an episode on it, and then when they enter that situation, they'll come back and listen to it and laugh with us, hopefully.

Blair: In case of emergency break glass. Thanks, David, this has been great.

David: Thanks, Blair.