Avoiding Cash Poor Clients


One thing I hear from my interior design coaching clients about meeting prospective clients for the first time, is how to know whether or not they truly have the money required for the project they envision. Too many interior designers just assume that they do, which can only lead to problems later on.

The first time you sit down face-to-face with a potential client, you’re going to quickly form an impression of many things, not the least of which is their ability to pay. And history proves that your initial reactions may just be dead wrong. (You remember that client, don’t you?)

Imagine, for example, a new prospect is sitting down across the table from you and perhaps referred by a good client. You peeked out the window and noticed that they arrived in a new Mercedes and you know they belong to the right club and their kids go to the right private schools.

If, at this point, you’re thinking they could be an ideal client, you’re putting the cart before the horse. Without more information, it may turn out that the Mercedes, the country club, and the private schools are precisely why they are all but broke!

Assume Nothing

It’s better to take a moment at this early point and realize that you really have no idea whether they might become a good interior design client. They may be highly leveraged, highly indebted, the owners of a struggling business on the brink of bankruptcy, and have absolutely no liquid assets.

Then why would they be talking to you? Because this is the way some people live their lives—always on the brink…always thinking the next deal is going to be the big one, the company will be acquired, the company will go public. Whatever their story to themselves has always been.

But I teach my interior design coaching clients that there are ways to discover whether a client can pay for a large project, and this can be achieved with a series of very innocent questions during initial interviews. They’re just not the questions that you would normally ask, and they need to be practiced.

This is really critical in a business like interior design, where the majority of your wealth over time will be created from whales and not the marginal client. The real cost to you of taking any job is that it prevents you from taking the other job. (Opportunity costs.) So while you’re sitting there thinking of the Mercedes in the parking lot, what must be kept in mind is that despite initial appearances, a cash poor customer will not only become a problem customer, but will exhaust your capacity to take the good customer when they come calling.

Poor Client Math

So, let’s do a little bit of reasoning on the prospective customer’s current home. Simple questions would include, “How long have they owned it?” It will be easy enough for you to ballpark what they paid for it. With that information, and knowing that jumbo loans require big down payments, you can determine that at some point, they had some cash. If your prospect paid $2 million for a home, you might assume that at that point time they had $200,000 to $400,000 of cash to put down.

If the project they have in mind is under six figures, that may be enough to give you confidence.

But if the project is larger, you’ll want to go further. For example, with a down payment of $400,000, there’s still a mortgage of $1.6 million. Using the realtor’s 1% rule of thumb, that’s about an $16,000 a month payment. If we use the other rule of thumb that even at that level of wealth one should not spend more than 28% of monthly income on housing, we can assume that the person making $16,000 month mortgage payments has at least a $57,000 month gross income. Multiplying that times 12, we discover a person who should be earning $685,000 a year.

But are they? Can you discern from the job they hold or the business they own?

And as for that $685,000 (which may sound like a lot to you) those payments are made with after-tax dollars, so, using a tax rate of 30% this individual has a after-tax annual income of $480,000 divided by 12 is $40,000, minus the $16,000 mortgage payment leaves discretionary income $24,000/mo.

Still sound like a lot? Well, let’s deduct several luxury cars at $1,000/mo each, the $6,000/mo combined private school tuition for three kids, a second home on the beach…maybe a timeshare…the country club, nannies, maids, pool service, lawn service…

It goes fast my friends, which is why so many people with what appear to be great incomes are cash poor and essentially at all times, broke.

This is not a person that is going to be able to spend a few hundred thousand dollars on interior design projects. Unfortunately, it is the person who would like to make you think they could, and may actually believe it themselves.

When this client seems hesitant at your first request for a $25,000 deposit, or $15,000 retainer, don’t forget while you’re sitting in their opulent office or country club that they may be hesitant because they don’t have the cash… Something they’re never going to tell you and which even their friends are unlikely to know.

Do They Own a Business?

So how can you tell? How do you know if they just look rich and might truly be cash poor? Here are a few ways I offer to my interior design coaching clients to start to separate cash poor from cash-rich.

If the individual owns his own company, there is the potential for a great deal of wealth. An important (and innocent) question to ask would be the number of employees the company has. I spend a lot of time around small business owners in a variety of different businesses and I tend to think there’s a pretty large separation at about the 50 employee and up mark. With 50 or more employees, the owner is no longer a mom-and-pop. This owner has banking relationships, lines of credit, a human resource manager…even a CFO or controller. This is a fairly sophisticated company, the type from which he might start to draw a significant salary.

Now for a pop quiz. Would you rather be qualifying the owner of a fast-growing firm, or of a firm that is somewhat mature and stable? The answer is the latter. If a company is growing rapidly, it will need every bit of cash and profits to be reinvested in the business. This is when the owner will take out as little for himself as he can get by on.

Ownership of a stable, mature business with 50 or more employees (100 or more is even better!) identifies an individual who is likely to be taking $450,000 or more out of that company each and every year. So, questions like, “Tell me about your business” not only feed egos, but provide critical information to you.

Are They Involved With Philantropy?

Another line of questioning you could pursue is whether they are involved with philanthropic organizations or local charities. Most people don’t get appointed to the boards of major charities if they are not personally a contributor. And almost no one contributes money or gives away money to a charity, school or any activity if they don’t have plenty of cash to spare. Of course I’m not talking about a $100 contribution, I’m talking about those people at that gala who bought the $5,000 or $10,000 or $25,000 table. Those people have some cash to burn because few people will give away money that they think they might need for other reasons in the near future.

Are They a C-Level Executive?

Most executives at large corporations make a lot of money (high six to low seven-figures), have great retirement plans, and are accustomed to moving around in worlds of country clubs and wealth and they probably have a sense for design. So whatever the large corporations in your community are, those C-suite executives (CFO, CEO CMO, etc.) are probably somewhat cash rich. They work long hours and experience world class design during their travels, even if just at top hotels. And they’re so busy that they may not even have time to spend all of their money, so they might as well give some to you!

How Many Homes Do They Own?

People who have multiple homes are not necessarily cash rich, because I’ve certainly seen people get overburdened with multiple real estate interests, but they’re worthy of a conversation. (And with multiple properties, are more likely to have a project in mind.)

Here are a few more observations. Whether or not you can find a way to discreetly uncover the facts, I’ll have to leave to you:

  • Do clients own or lease their luxury cars? It used to be the case that people who leased vehicles were often cash poor, but the way luxury car manufacturers promote leases today, they constitute the majority of all car owners, rich or poor.
  • Are they a stock market investor? It’s hard to get to the bottom of this because people may pretend like they have a much larger interest in the market than they really do, but a conversation about the “crazy stock market lately” is an easy one to have and if the person has interests in international funds, hedge funds, and oil and gas…then certainly all those require cash and could be an indication of a person who is generating a fair amount of cash each year.
  • Do they fly private? And even more importantly do they own their own plane? Sure, that plane could be leveraged to the gills, but insurance, maintenance, pilots, and fuel have to be paid for with cash. Some studies I’ve seen say that the people who own their own jets earn about $9 million a year on average. I think at that point, you can wrap up the qualifying and start selling!

By the way, the average age for private jet owners is 57, they have two or more residences and at the top of the list of what they tell pollsters they’re going to spend the most on each year—more than cars more than travel more than jewelry more than clothing—is home-improvement and furnishings! Many say they expect to spend more than $500,000 on these things in the year ahead.

Fortune 1000 CEOs, sports stars, celebrities, the Forbes 400 list, people whose companies just went public or were acquired… Good prospects, all.

Your Goal? The Fewest Clients You Need!

I’ve always maintained that too many interior designers think that sales and marketing is about getting the most possible clients, when it should be about getting the fewest clients necessary! (Necessary to achieve your goals.) The key is to make sure that every client is an ideal client, and that means they not only have cash, but they have enough cash to not kick and squeal over every penny billed to them.

A little detective work in advance can go a long way toward that. Put these ideas to work on your new client interview checklist. You do have a new client interview checklist, don’t you? My interior design coaching clients do!

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