Sometimes subcontracting should be considered. It allows various parts of the business to be carved out and handled by someone else who may be better able to handle them. For instance, you may be terrific at sales and have an idea for a wonderful new product, but you may not have any production expertise or ability or plant and equipment. Having someone else make the product for you in this situation makes sense.

Inventors sometimes take this step even further. They may be good inventors, but have no sales or production abilities. They may be good inventors, but have no sales or production abilities. They frequently have someone else sell as well as produce their invention. They license the rights of manufacture and sale to someone else and in return are paid a royalty. This goes much further than subcontracting, but it represents the extreme extension of the process of turning over parts of the business to others. Of course, if you turn over all parts of your business to others on a subcontract basis, there will be little left for you to do, or be paid for.

Subcontracting also can be used as a form of financing. If you turn over production to someone else they have to finance it. They must invest in the plant, equipment, wages and supplies. You will no longer have to buy the plant and equipment or provide the working capital. Your costs will be limited to the price of what you buy for resale as you need it.

There are drawbacks to subcontracting. One is that the subcontractor gets the profit attributable to the part of the work it does. Another is that you will not longer be in control of quality or production schedules. Your job may not be the highest priority job for the contractor either. You are also subject to the subcontractor's own problems. If its creditors close it down, you have a supply problem.

Hiring sales reps or using a distributor to sell your products is another from of subcontracting, although not usually thought of as such. This enables you to expand your sales opportunities or even to obtain sales skills if you do not have any. You should be aware that the sales rep or distributor will usually have other products to sell and may neglect yours. Or it may do something which gives your product a bad name.

Subcontracting involves contracting. You are making a contract with someone else. Who gets the better end of the deal will depend on relative bargaining strength. Whatever the terms of the particular deal, you should always retain the right to terminate it on short notice without giving any reason. Otherwise, you may be stuck with someone making your product wrong or late or someone who is mistreating the customers.

Part of the business you are buying can also be resold to the subcontractors. This can be done at the same time as your purchase. This reduces your cash needs in the purchase.

Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
Ph: 312-782-0844 * Fax: 312-201-1436 * Email: donthompsonlaw@sbcglobal.net