On Thanksgiving Day 1998, Michael Solomon seemed to have little to be thankful for.
The prepaid long-distance phone card business he launched as a college student had suddenly hit the wall, and he was faced with 35 wholesale customers which had sold his cards to hundreds of users.
Solomon is not unlike many young entrepreneurs who see an idea and go on a tear with it. Quick to take advantage of a hot new idea, he leapt before he looked carefully -- and paid dearly for his impetuousness.
Fortunately, he was able to recover from his losses, restart his prepaid long-distance service and launch an Internet service provider company that targets business customers. Steel City Telecom now offers Internet access to about 130 business customers, in addition to its long-distance services.
A promising market
Eager to take advantage of the emerging prepaid long-distance card business, Solomon launched Steel City Telecom in the mid-1990s while still a student at Robert Morris College. He figured he could build a viable business by selling the cards to wholesalers, who, in turn, would sell them to operators of high-traffic retail locations like convenience stores, newsstands, even halfway houses and penal institutions.
The industry was in its infancy, and Solomon saw a market that was going nowhere but up, and fast.
He had worked as a bartender, a telephone solicitor and a delivery driver for a restaurant operator, but he saw an opportunity to launch his own business in the emerging prepaid long-distance business. He located a company in Miami that would allow him to sell prepaid cards for access to its long-distance service, which it provided through a long-distance carrier.
Solomon beat the pavement and sold the cards to his target market.
But just before Thanksgiving 1998, the prepaid business turned into a disastrous house of cards for him. The company went belly up, leaving hundreds of unsatisfied customers that couldn't use their cards. Solomon was in a bind. He wanted to stay in the prepaid long-distance business because, he says, he believed that it had great potential.
But he knew he couldn't unless he made good on his promises. He had to either provide the service he promised or pay back the money to holders of the worthless cards.
"It was bloody," says Solomon.
It turned out to be $15,000 worth of blood. Solomon tried to contact his supplier, he says, but couldn't get a straight answer. Ultimately, he discovered it had gotten behind in its payments to the long-distance carrier. So he stopped payment on checks to the company, but the losses mounted.
"To be put out of business by someone else -- I didn't think that was an option at all," says Solomon.
He borrowed money from family and friends to pay off the useless cards and buy his own long distance switching equipment so he wouldn't be dependent on third parties for the service. The move means Steel City Telecom has more control over the service and can reap bigger profits.
But in Solomon's mind, the company wouldn't have been able to take that step unless he had made good on the worthless long-distance cards.
"If you don't, in the future, no one's going to believe what you say," says Solomon.
He acknowledges that, in retrospect, he should have done more due diligence before agreeing to sell services on the promise that his vendor would be able to continue to provide them.
Worth the risk?
Getting into business arrangements that rely on the services of one supplier is risky, but sometimes necessary and not entirely avoidable, says Louis Plung, partner with Louis Plung & Co., a downtown accounting and business consulting firm.
Solomon's situation isn't all that unusual, it turns out.
"Particularly when you're starting out, you have to take some business risks," says Plung.
He suggests due diligence be undertaken to mitigate the risks you might face when engaging a supplier or vendor. Informal checks can be done with other customers of the company, or business owners can hire a firm to check on the prospective supplier.
Dun & Bradstreet is probably the best-known firm that researches businesses and provides information on their creditworthiness and other data, but several others offer the service as well. And the Internet makes it easier than ever to track down information that can help you make a smart decision.
Nonetheless, Plung says business owners always face a degree of risk when fulfillment of their business obligations hinges on the ability or will of a third party to deliver.
Says Plung: "Even then, when you do all the due diligence, there are no guarantees." How to reach: Steel City Telecom, www.steelcitytelecom.com or (412) 209-0065; Louis Plung & Co., www.louisplung.com or (412) 281-8771
Ray Marano (firstname.lastname@example.org) is associate editor of SBN.