Pam Krank started The Credit Department Inc. in West St. Paul, which manages credit and collections for client companies, in 1993. In 1999 she landed the deal that would make the company: a multimillion-dollar contract that caused her to double space, add debt and attract investors. That contract almost led to the company’s demise. We had been around for six years before we had an opportunity to land a very large contract, several million dollars. Before that it had been half a million or so. We were very excited.
The first contract, it was all in their favor. There was no room to negotiate. We hired people. We spent many thousands of dollars on technology. Like a lot of small companies, you put in whatever you need to do it right.
We were confident in 2001 that we’d get a renewal. We had great results — we saved them $2 million to $4 million over two years, and they had no bad debt. We were in a very good bargaining position.
Their CEO, he came over to the St. Paul side, and we went to lunch. He took out a napkin and wrote down the terms: a 30 percent increase a year in price, a five-year agreement, and we wanted an incentive clause. He was going to write up the terms from the napkin.
We had an attorney who had been with us for four years. He knew our business left and right, and he had written our other contracts. I said, last time I just had to accept their terms. I said, this time I need an ironclad five-year agreement, because we needed to develop these very sophisticated processes and technology. I didn’t want to get in this and invest money and then they’d cancel.
Our attorney said we should have a breakup clause, that’s typical. If they exit they have to pay you money. He put it in, and they took it out. I said OK, if that’s not in there then the only way to get out of it is if they file bankruptcy or we file bankruptcy. That became part of the agreement.
Lesson No. 1. There is no such thing as a level playing field with a large client. But that’s why I had a lawyer, right? I fax it to my attorney and he says go ahead and sign it. I sign it. Because of that I take on the new space, twice as expensive as my old lease, $150,000 of debt, we get into the Milestone Growth Fund arrangement, they invested $250,000. This is December of 2001.In 2002 the CEO I negotiated with on the napkin retires, he’s gone.
Mr. New CEO comes in and everything’s fine. But in 2003 he says we need to cut costs, and I said we have a five-year contract but we could look at changing service. We said, we are a bargain. No, he says, I need a better price. He came right into my office, pointed his finger and said — I’ll never forget this — you will cut this price in half or I will find someone else.
I said no. He was furious. He was convinced that we would bow. I would say, I’ve got a five-year contract. I called my attorney and said, could it possibly be that he has the power to cancel? My attorney wouldn’t call me back.
I said, you’ve got to be kidding me. This is my company. This contract represented 50 percent of our business.
I’ll never forget, I was at my son’s band concert, and I get the phone call, telling me that there was a 90-day out clause in the contract. It essentially overruled the bankruptcy clause. I could have died right then and there.
Lesson No. 2: Don’t think that other people, just because they’re more educated than you, understand your contracts better than you do.
In September ’03, we get a 90-day notice that they’re canceling the contract. They canceled the contract as of December ’03. Here we all sat with over half our revenue gone.
We didn’t think we would go out of business, but we did look at what would happen if we walked away and started over. We said no, I’m not going to do that. Deep down I knew that we would come back, but I also knew that we got screwed.
Even though I teach at two universities, I, like lots of entrepreneurs, am undereducated in terms of traditional education. I have a two-year degree. So you automatically assume that someone is smarter than you are.
This situation, it gave me a lot more confidence. Instead of beating myself up and saying, you’re so stupid, you’re so stupid, instead I read everything now. I’m ultimately responsible.
We settled with the lawyer, in March 2005, and with the client, in December 2004. People say, was it worth it to go through to settlement? But I have to end something before I start something new.
We hit break-even last year. We had a devastating 2004; we lost $200,000. The biggest lesson I learned: Never stop marketing because you hit a comfort level.
I had to really start over like I was a startup again. I had to start over with getting my face out there. 2005 was profitable. 2006 looks very, very good. We won’t be back to $1 million yet, but we’re close. Now we have seven employees, but we went from 15 down to three.
We had never job-costed before. We now cost every single expense, so I can tell you exactly how profitable we are on each contract.
We never want a concentration problem ever again. We want no one client over 10 percent of revenue, so we land a big contract and start immediately looking to land the next one.
There’s another thing I realized: This is just a business. You learn that you can get through it, and you’re humbled by what other people have to go through. I have a happy marriage and great kids. My employees have been so wonderful, they said they’d do whatever it takes. And that’s all I need.
— As told to Beth Ewen
[contact] Pam Krank is president of The Credit Department Inc.
in West St. Paul: 651.451.0164; pkrank@tcd.com; www.tcd.com
