BUSINESS
STRATEGY
Sheila Forst Ruof
Visions of sugarplum fairies have been replaced these days with IPO (Initial Public Offering) fantasies. Recent college graduates look not only for a job with security, but also for equity plays with stock options.
Magazine articles bombard us with tales of overnight billionaires. They might be whiz kids from Silicon Valley; they might be entrepreneurs in Managed Care Mania; or they might be a combination of the two strategically aligned and uniquely configured as an Internet enterprise. Whatever their product line, the clear message from each of these latter day heroes is "I knew when to get into the business, and I certainly knew when to get out."
Their compelling success stories are valuable models, of course. But seldom do we hear how managers deal with the everyday transitions that comprise most business decisions. Yet these are the circumstances that make or break the future of managers and executives, and sometimes, entire organizations.
What about the product line that has lost its niche and is floundering? How do we respond to the uneasy takeover of a competing not-for-profit? What can we learn from the reluctant folding of a venture that just isn’t making a go of it? Why are we disillusioned about our venture partners and their intentions? These are classic examples of enterprises that needed an exit plan from the outset.
The Occupational Health Venture
Entrepreneurial healthcare ventures are replacing or supplanting product and service lines once wholly owned by hospitals and health systems. Occupational health is no exception. Focused, for-profit management companies, both public and private, have appeared in response to market need and payer demand.
Leaders are emerging from niche markets once dominated by hospitals: laboratories, outpatient surgery centers, rehabilitation facilities, and disease specific programs, for example. The business models of these companies vary. Increasingly however, provider owned occupational health programs and clinics are entering into a variety of relationships with for-profit companies.
As hospitals and health systems succumb to increasing financial pressures, they make decisions daily about which product lines to keep, which services to divest, and which models will best support continued service to the community while maintaining sufficient influx of capital. Mergers, acquisitions, and joint venture relationships abound in this fluctuating environment.
Will the Marriage Last?
As the pre-nuptial agreement is to marriage, so the exit strategy is to a business venture. In each case, if you can’t agree to terms when times are good, what chance do you have when the venture turns sour? Clearly defined expectations do not always guarantee success, but they lay the groundwork for planned achievement, accountability, strategic direction, and financial decision making.
Exit Is Easy When Times Are Good
When business is booming and the market is hot, it is not hard to choose a way to maximize that momentum, in order to earn a handsome return on your investment. The formula is easy to follow, well established, and readily available to anyone who wants it.
1. Pick your preferred way to cash out of the business. That might be a
- Spin-off of the business from its parent, an
- IPO (Initial Public Offering), a
- Merger with a competitor or synergistic enterprise, or the
- Acquisition of one or more related businesses.
2. Call an investment banker. There is one claiming to specialize in your market, or just the deal you want to do. Start asking around, and you will see: they jump out of the woodwork at the whiff of a potential deal.
3. Do the deal;
4. Pay the fees, and
5. Pocket your profit.
But What If Things Are Not Booming?
However, if the market is not good for your industry right now, or your venture is less than satisfactory, the situation and its solution take a very different turn.
Most often, when a venture has begun to show signs of being unsuccessful, management chooses to wear blinders, and let attrition take its toll. Sadly, that is the greatest waste of capital, talent and resources – and the worst way to deal with the situation.
Another option when things are going poorly is to try to fix it. This usually entails a new management team, a reorganization, some drastic cutbacks, and some bad press. It is worth it when it works, and often it does. But it feels bad to everyone involved for a very long time.
A third and even more unpleasant alternative is the public demise. This can be a bankruptcy, a legal reorganization, or a liquidation forced by the company’s creditors. When things get this far, they are rarely fixable.
What Else Can Be Done
Several often overlooked options are available to troubled endeavors.
A product line with even a small market share can be sold, if it has other value and the price is realistic. Sometimes, a name alone is marketable, and can be maximized by its buyer better than it could by its existing owner.
Surprisingly, struggling businesses have sometimes been saved by buying more successful ones, if they have access to the capital required.
How to Avoid the Problem in the First Place
Anytime a new venture begins, it is a euphoric experience. Yet in the adrenaline rush that accompanies any start-up, too many executives forget that the most important part of starting an enterprise is knowing how and when to stop it.
A business plan that lacks an exit strategy might just as well have no market intelligence, or no pro forma financials. Without an exit strategy, it isn’t a plan. It’s only wishful thinking.
Unfortunately, many executives interpret "vision" to mean creating one to three year projections of revenue and costs. They stop short of asking the most critical question: "What will happen when we meet these objectives?" The answer to that question can mark the difference between market dominance – and obsolescence.
An "exit" strategy does not have to be a way to get out of the business you are in. It simply provides a way to measure and move beyond the basic venture that you started. You might choose to do that by expanding the business, by leaving it altogether, or by some variation on one of those themes.
When to Create an Exit Strategy
The time to create an exit strategy is well before you think you need one. In fact, the best time to devise an exit is when you enter any new market or product line.
Most people in business today know that you can’t grow a business just by being good at what you do. You need a larger vision: this is what separates us from the competition, and secures our place in the market three, five, and ten years from now. When your vision encompasses a realistic look at what happens in more than three years, it highlights the need for an exit plan.
A good exit strategy will consider a number of options:
- What if your growth actually occurs according to the plan you envision?
- What if the market changes substantially from what it is now?
- What if technology or some other force dramatically changes the nature of your venture?
- What if an external player seriously erodes your market share?
The best exit strategies do not merely kick in somewhere down the line. They have to be reviewed regularly to make sure they sustain viability, in light of constant changes in market intelligence.
Quantifiable markers need to be built into the business plan, and consistently measured to determine the plan’s relevance. Someone has to be held accountable for evaluating those measurements.
Most importantly, someone has to be responsible for correcting the business’ course if it is not leading toward the agreed upon exit strategy. Realistically, the only "someone" who can make that happen is the CEO.
The annual mandate of your Board of Directors should include reviewing the progress of the company not just in light of earnings and market share, but also related to its ultimate goal: the exit strategy.
A business can be right on target for growth, revenue, and expense control, but still be heading for dangerous waters. Annual review of progress toward your exit plan – your tool to lock in the return on your investment – will help ensure safe passage and a clear vision.