When Taunya Painter worked as a senior corporate counsel for Wal-Mart (WMT), she noticed that many of the small suppliers that wanted contracts with the world’s biggest retailer, known for pressuring suppliers to cut prices, hadn’t done all their homework. Few fully understood what they would be signing and few took advantage of Wal-Mart’s supplier development team, a free resource designed to help less-experienced suppliers forge enduring relationships with managers and buyers. (Other large retailers, including Home Depot (HD), Best Buy (BBY), and Ace Hardware have in-house teams meant to serve similar purposes.) Painter, who worked for the mega-retailer from 2002 to 2007, says more of the entrepreneurs she dealt with might have managed to secure and renew contracts if they had familiarized themselves with these two pieces of the supplier-retailer puzzle.

While there are more pieces to the puzzle, by taking the time at first to understand what the contract entails, a potential supplier can determine whether or not it even makes sense to try to become one of Wal-Mart’s 57,000 U.S. suppliers. The contract, commonly known as the vendor agreement, outlines the mechanics of how the supplier and retailer will work together. The agreement generally addresses sales and delivery timeframe, arbitration, and termination rights, and liability. As a rule, Wal-Mart uses a non-negotiable boilerplate. Charley Moore, CEO and founder of legal service RocketLawyer.com, says this means potential suppliers can study similar contracts online before meeting with the buyer.

Wal-Mart generally starts out smaller suppliers in a local market, delivering goods to up to 50 stores, as a test run. If the supplier provides a high-selling product and proves reliable, it might be considered for national distribution. Bruce Zutler, CEO and co-founder of MCI Products Group, a New York-based company that specializes in new product development and overseas sourcing, recommends small suppliers think of the test-run as the time to prove they are capable. “If you have a good product and you strengthen their sales, then the buyer will stay with you,” says Zutler.

Broad Customer Base a Must

But suppliers should know that Wal-Mart will only work with suppliers that can prove three-quarters of their business comes from entities other than Wal-Mart, per Wal-Mart policy. After proving that, the key to impressing a buyer is to show understanding of the potential market, says Theresa Barrera, vice-president of supplier diversity for Wal-Mart. “What sets some of these smaller suppliers apart is being innovative and knowing what sells in their regions.”

It is also up to suppliers to understand the impact of national trends on Wal-Mart and be prepared to adapt, says Excell La Fayette, director of supplier development. He, too, urges suppliers to do their research before they call. “A lot of people think Wal-Mart is kind of a free-for-all; that if they come in we’ll buy anything.”

Fair Oaks Farms cooks, packages, and ships the meat for Wal-Mart’s Great Value brand breakfast sausage to more than 50 stores in different regions across the country. Michael Thompson, president and CEO of the Pleasant Prairie(Wis.)-based company, says the key to landing a deal and getting the contract renewed over the companies’ ongoing five-year relationship was conveying an understanding of growth opportunities and explaining what his 300-person company could do to meet Wal-Mart’s needs. Beyond that, he says it is important for hopeful suppliers to remain persistent, be patient, and bring their “A-game” to the meeting with the buyer.

Liable for Chargebacks

Of course, even if a supplier does manage to convince Wal-Mart to sign a supplier agreement, it almost never obligates the retailer to buy anything. “I tell people not to pop the cork when the contract is signed, but pop it when the purchase order comes in,” says Painter, who now runs her own law firm in Texas, specializing in domestic and international business litigation. Wal-Mart says its payment cycles vary by category, but that most suppliers are paid within 30 to 45 days.

And suppliers looking to sign should also know that even if everything is done right, the state of the economy could derail chances that the relationship is profitable, at least in the short term. Nina Kaufman, a business attorney in New York who posts frequently on her blog, AskTheBusinessLawyer.com, says suppliers should be aware of how large retailers like Wal-Mart manage low sales that result in surplus inventory. Those designated “guaranteed suppliers” guarantee that their product will sell. If they don’t, a provision in the contract makes them liable for chargebacks.

Ultimately, understanding all aspects of the supply chain is key to landing—and renewing—a deal with Wal-Mart. Painter says getting an experienced supplier to serve as a mentor can also be invaluable. “I always suggest tapping into resources the retailer has other than the buyer,” says Painter “It’s important to know who are your allies in the organization.”

We all know that entrepreneurs find opportunity where others see only roadblocks. Sometimes those roadblocks are legal in nature. But from Prohibition to today’s ban on the sale of raw milk, enterprising small business owners have found a way to operate on the periphery—and some are even inspired by it. Lou Waddle uses his Chicago bar’s illicit history as a speakeasy as a marketing tool. Leon Rainbow sells his graffiti, an art form defined by its illegality, to corporate and government clients. And Kevin Mitnick used his skills as a hacker to transform himself from a jailbird into an international security consultant. These entrepreneurs have emerged from the underground to flourish in the mainstream.
A Dairy Farm Built on Raw Milk

The Lubbers’ first business, a 35-employee waste reduction and recycling business, was conventional enough. But when their six-year-old daughter, Jamie, was diagnosed with brain cancer in 1993, “It just pulled the rug out from under us,” says Karen. The couple sold the business and started studying cancer. “I became more and more alarmed about what was in our food, and then what was not in our food,” Karen says. “My daughter was dying. She lost 40% of her body weight.” Nervously, they began feeding Jamie raw milk. They believe raw milk to be more nutritious, but because it’s unpasteurized, it’s illegal to distribute in most states.

Jamie turns 23 this summer. The Lubbers won’t tell you that raw milk saved her life, but the experience was enough to turn them into farmers. Today, their 120-acre sustainable farm, on which all five of their children work part-time, earns about $100,000 a year. More than half of that comes from the sale of raw milk. To stay legal, the Lubbers sell shares in their cows, making their customers “owners” and so, by law, licensed to drink the raw milk produced by their animals. For $200, a mix of health nuts, environmentalists, and foodies get a tenth of a cow, which amounts to two gallons of raw milk a week and a share of the beef when the cow is eventually slaughtered. “It’s a living, breathing, wild food product,” says Karen. “Of course there’s a danger to it. But pasteurization is a coverup. Until we can look in the eye of the guy whose food made us sick, we’re going to continue to have food safety problems.”
Behind the Green Door (Tavern)

During Prohibition, those who enjoyed a stiff drink devised their own language. “Having a green door at your restaurant meant you served booze,” explains Lou Waddle, a real estate developer who bought the Green Door Tavern, a former speakeasy, with two partners in 2001. “The name, and the entrance, stuck after the place became legitimate.”

As did a few other features. The wooden building, one of the oldest in downtown Chicago, was built right after the fire as a temporary structure. It famously leans almost 18 inches from the ground to the roof. A twisted, tilting staircase leads to the basement, where the original owners, the Giacomo family, tucked the speakeasy. It’s also where they hosted a cast of colorful characters, including legendary Chicago bosses. Today the bar promotes the space as a glamorous site for private parties, events, and concerts. The bar, with 20 employees and $1.5 million in annual sales, is also benefiting from a surge in nostalgia liquor brands and Prohibition-era drinks. “It’s like walking into a fun house,” Waddle says. “But we’re never changing it. The Green Door is timeless.”
From Hacker to Security Consultant

If there had been an opportunity to do it all legally, says Kevin Mitnick, he would have. But the world-famous hacker, who was arrested by the FBI in the mid-1990s and eventually served five years in prison for myriad computer crimes, just didn’t have the proper outlet for his inquisitiveness, he says, tongue lodged firmly in cheek. “Hackers back in my day were all old school,” says Mitnick. “There was no Internet. There were no security regulations. We were just doing it for the intellectual challenge and curiosity.”

A decade ago General Electric (GE) experimented with a promising approach to employee health care known as disease management. It hired a company to talk with workers in North Carolina who suffered from heart disease. Nurses called to encourage them to take their medication and get moderate exercise as a way to avoid expensive hospital stays. Around the same time, large corporations in many industries began paying for similar disease-management programs to keep employees healthier and cut costs. “It seemed too good to be true,” says Dr. Robert S. Galvin, GE’s chief medical officer. And, he adds, it was.

During the trial, GE didn’t see any compelling evidence that disease management saved money or substantially improved worker health. Galvin decided against expanding the program.

In exercising that caution, he is a lonely figure. Disease management—despite a series of studies finding that it doesn’t deliver what it promises—has caught on throughout the business world (BW—Feb. 1 & 8). Employers and government agencies are spending a total of $2.5 billion a year on the services. Aetna (AET), Cigna (CI), and other insurance giants sell disease management. Healthways (HWAY), the leading company in the field, has seen its share price double over the past year, as Wall Street anticipates health reform legislation that will provide incentives to adopt the approach.

Even with serious doubts hanging over the Obama Administration’s campaign for change in the insurance system, Congress is expected to approve some kind of slimmed-down bill that will promote disease management. That perplexes Galvin and other skeptics. At GE, a company known for savvy management of employee benefits, “the idea that you are going to save enough on hospitalizations to save money over and above what the [disease-management] program costs just didn’t pan out,” he says.

Companies marketing disease management counter that in-house research shows such services sharply reduce costs. In Washington the industry has spent generously on lobbying to convince politicians in both parties that the government should expand the business. Lobbyists have distributed an industry-generated study showing that disease management and related efforts could save Medicare, the public insurance program for seniors, $652 billion over 10 years.

But outside analysts say the case for disease management—and the data its marketers emphasize—typically rely on exaggeration and ignore the cost of the service itself. “These companies are making so many claims that are never subjected to any scrutiny,” says Soeren Mattke, a senior scientist at Rand Corp., a nonprofit research group funded by corporate and government grants. In August 2009, Rand issued a report for the state of Massachusetts concluding that disease management could increase employer and government spending in the state by $6.7 billion over 10 years with little overall benefit. Specifically, Rand said that even when researchers used “highly optimistic assumptions,” the cost of the services made any savings negligible. One reason: A lot of preventive attention ends up directed at relatively healthy people who wouldn’t require hospitalization anyway.