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Solving the Payment Problem

Added on by Gamal Hennessy.

By Gamal Hennessy

As a freelance professional or a small business owner, getting paid on time can be the difference between surviving for another month and financial disaster.  For many of my clients, getting paid is just as important as finding new clients. Some of them don’t have the time or the resources to find new clients because they spend so much energy chasing after the money they are already owed.

This isn’t an issue unique to my client base. There are many articles revolving around the freelance payment problem (See She Waited 120 Days to be Paid and Would You Settle for Half of What You’re Owed?) I’d like to offer three techniques to navigate around the payment problem, including the method that I use with my own clients.

Three Paths Around the Payment Problem

1)    Set out clear payment terms in writing before you start a job: A small business owner has to wear many hats. At times, administrative tasks are done in a stripped down fashion or ignored altogether to maximize time and resources. Formal and comprehensive contracts often become a casualty of this process, because negotiating a deal can be confusing, stressful, time consuming and might result in lost business (See You Signed the Contract, but Do You Know What it Says?). But not having a contract can be more detrimental in the long term. Without a written agreement, the terms of your engagement are based on vague and biased recollection. Without clear payment terms, you could be at the mercy and cash flow of your clients. Without an actual contract, your legal remedies could be limited.

2)    Take advantage of human motivation when defining your payment terms: I have observed a specific aspect of human nature in my practice. When a client wants something, he has more incentive to pay. After the client gets what he wants, he has less incentive to pay. If you structure your payment terms to receive payment weeks or months after you deliver your goods or services, you are working at a disadvantage. I will explain my method of adapting to human motivation below, although I realize not everyone is in a position to be paid before the work gets done.

3)    Know which jobs to walk away from: Instinct and experience can warn you when a potential client might pose a payment problem. If your background and reference check of your clients reveal red flags, or if you get the sense in your initial discussions with your new client that cash flow might be an issue. It might make sense to pass on the job and focus your attention on the paying clients. (See Twelve Tips for Contract Negotiation) When you do work for someone who isn’t paying, you not only lose time chasing them down for money, you lose time finding and servicing those clients who are actually growing your business.

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The Tennis Method for Payment Terms

            As a lawyer, people expect a certain amount of cold blooded professionalism from me. In almost ten years of independent practice, no client has questioned my payment terms or been late in paying me. I think the method I use is applicable to other types of small business, so I’ll share it with you. Please feel free to modify it for your needs.

            The tennis method gets its name from the back and forth dynamic of my business process. A typical engagement has six parts.

1)    First contact: A client finds me through a referral or an online post and requests a free consultation online or over the phone.

2)    Engagement letter: Once I understand what the client needs and I determine I can do the job, I send the potential client an engagement letter laying out the service I am willing to provide and the payment I require for that service.

3)    First payment: The client expresses their agreement to the engagement letter by paying ½ of my fee upfront.

4)    Work: I perform all the tasks detailed in the engagement letter (See C3 Services)

5)    Second payment: When the work is done, I notify the client and the client delivers the second portion of the fee.

6)    Delivery: Once final payment is received, all the deliverables are sent to the client.

            Notice how the dynamic plays into human motivation on both sides. Once the client pays, I have the incentive to start working because she gave me money and because I know I won’t get the rest of it until I do the work. The client pays because they know nothing will happen until they pay and after they’ve made the first payment, they don’t want to throw their initial money away by not getting the work. Everyone stays honest and everyone gets what they want.

Fit to Taste

            Every small business may not be able to utilize the tennis method. The goods or services you have might not lend themselves to this process. You might not be in a position to dictate payment terms (See David and Goliath in Contract Negotiation). But in extreme cases, it might be better to walk away from a deal you won’t get paid for than to stick it out, hope for the best and not get paid (See How to Reject a Bad Contract). Getting paid is an important aspect of small business and you can only work so many hours in a day. Get a deal in writing that protects your business and let someone else deal with the problem clients.

Have fun.


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How a Lawyer Beat Darth Vader

Added on by Gamal Hennessy.

By Gamal Hennessy

Star Wars is one of the most well-known franchises in modern entertainment. Return of the Jedi holds a special place in the mythology of the Jedi saga. But the film that gave us Darth Vader’s last moment of redemption is also the film that continues to disappoint at least one actor.

Several news sites reported on a recent interview with David Prowse, the actor inside the Darth Vader suit for Return. According to letters received from Lucasfilm to Mr. Prowse, Return of the Jedi has never made enough money to trigger a net royalty payment for his performance. In spite of the film making more than five hundred and seventy million dollars in the box office since its initial release over thirty years ago, Mr. Prowse, and actors like him, are not in a position to get paid beyond their initial salary for the project.

Gross vs Net

While the story is notable for the popularity of the character and the prestige of the film, the elements of it are fairly common in contracts of all types, not just entertainment related ones. The difference between gross and net in the calculation of revenues can be the difference between being paid indefinitely and not being paid at all.

A while back, I wrote a piece about the difference between gross and net payments in creative contracts (See Your Slice of the Pie: Part 1). I explained Gross revenue or gross profits as the pure income that a product or service generates while Net revenue or net profits is the income that a product or service generates minus certain expenses. Taking a very simple example, if you acted in a film and were promised a cut of the gross revenue, you’d get paid based on how much money the movie made. If you agree to take a cut of the net revenue, you get paid based on how much is left after all the expenses for the film are paid. If the expenses of the film are never paid off, then you never get any royalty, even if you are the most dread Sith in the galaxy.

Hollywood Accounting

The film industry is often blamed for manipulating accounting methods to avoid paying artists. The term “Hollywood accounting” refers to concepts like using net profits instead of gross to pay creatives and then extending expenses out forever to ensure a film never gets to a stage where royalties need to be paid. Hollywood might use these tactics in the most spectacular ways, but they are by no means the only entertainment industry with this practice. In fact, it is not just the entertainment industry. Any type of contract where payments are based on future earnings can be manipulated by the gross vs. net concept.

Eyes Wide Shut

People may mock actors like Mr. Prowse who agree to net profits, but these deals have to be considered in context to be understood. In many cases, a creative person is so eager to cash in on his big break that they agree to bad terms just to get the deal done (See You Signed the Contract, but Do You Know What It Says?). In other instances, an artist often doesn’t have the negotiating power to push for the best terms. (See David and Goliath in Contract Negotiations) Sometimes, an artist doesn’t have any legal advice when signing a contract. This often leads to situations far worse than Mr. Prowse (See Why Artists Need Lawyers)

One word or concept can make a world of difference to a contract. If you’re not trained to find it, not even The Force will be able to help you.

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Have fun.


Artistic Fantasy vs. Financial Reality

Added on by Gamal Hennessy.


By Gamal Hennessy

At some point, every artist needs to balance the relationship between their art and their finances. A musician might want to spend all her time practicing and performing, but if singing isn’t making her enough money to live, she might have to take an office job and spend less time with her music. A writer might want to create experimental work outside of the mainstream, but agents and publishers might push for a YA or historical romance, because the market for those books already exists. When your bank account and your craft pull you in different directions, you have to make a choice about what you can and can’t do.

Independent artists have an additional layer of complexity when it comes to the relationship between financial and creative resources. Many of us have finance the production and marketing of our own projects. Not only are we trying to make enough money to have a home to live in and food to eat, we need to pay to get our work out into the world. The new era of digital distribution has made it much cheaper to release work, but it still isn’t free (See How Much Does It Cost to Publish a Book Anyway?) Successful projects will cover their costs and turn a profit (See Profit and Loss Statements for Independents) but it might take a book several years to recoup its production costs, and some books never turn a profit at all.

In the face of this reality, I realized I have a problem for my books. My publishing goal for the next four years is to release two books per year (See What is Your Publishing Plan?) This goal has two parts; the creative side where I have to write the book and the publishing side where I have to pay to get the book out. From a creative standpoint, things are going well. My second book for 2014 is done and so is my first novel for 2015. I’m 60% done with the first draft for my second book for 2015 too, which puts me ahead of schedule. As a writer, I’m very pleased with my pace and my progress.

As a publisher, things are not so great. Various circumstances (some positive and some negative) limit my ability to fund my second release of this year. I’m uneasy about the idea of crowdfunding (probably because I’ve never tried it) and the idea of pushing the release back six months throws off the momentum I’ve built with my core group of readers. As it stands now, I simply don’t have the financial resources to cover my artistic goals.

So I made a choice. The book I planned to release in October (See The Dark End of the Street) will be put on hold until I can figure out a new spot for it in the publishing plan. Maybe I’ll put it out in 2016. Maybe I’ll release it as a series of short stories to spread out the cost over a few releases. Maybe it will become the “lost undiscovered book” people get excited about after I’m dead and all my other books have become well known movies. Whatever, it will go in the can until I’m willing and able to release it properly.

I know this isn’t a major problem. Many writers struggle to get just one book out per year and many more aspiring writers never release more than one book. We all have to balance our creative goals with our real world resources. In my case, I hope this is just a minor detour on the writer’s road.

Have fun.