Exit Planning Begins at Birth -- Interview with Joe Farach

Some companies are born to be sold. The hypergrowth-focused, IPO-tracked Silicon Valley start-up typifies this.

Others are born to make a profit. Most “normal” companies, like the non-chain “brick and mortar” stores physically in our communities, are examples of these others.

While many things are different between them, and many profit-focused companies go astray taking advice meant for exit-focused companies, there are many things that are the same.

Exit-planning expert Joe Farach took the time to explain to me some of what we can learn by thinking about exit planning from the very birth of our companies, regardless of whether we are exit-tracked or profit-tracked.

An acquisition (IPOs are very rare) occurs because there is transferable value. That value may or may not include patents, reputation, and customer relationships. Whatever else it has or doesn’t have for the value to be transferable, there need to be systems. Systems that work without you.

Growing a profit-focused business beyond the 10-million dollar revenue mark also relies on having systems, as does often your ability to take vacations.

So Farach advises thinking about systems on day one. Well before you have your first team members. The traditional wisdom here is to treat your business as if you were going to franchise, not because you will want to franchise it, but because it puts you in the right frame of mind for creating systems.

In addition to the “obvious” task-based systems, he suggests systems for maintaining the nature and alignment of the company and systems for employee development.

He sees that the key to maintaining the nature and alignment of the company is the development of a clear statement of values and vision that, from the very first day of employment, every team member can understand where we are going (vision) and how we are going to get their (values).

The values statement for one of the companies that he himself founded included

• ethical reputation,
• courage,
• persistence,
• adaptability, and
• fact-based decision-making.

None of which surprised me. Their vision statement did surprise me: They would be the lead company for that product in that market in some number of years. It’s more concrete and measurable than any vision statement that I had ever heard for an early-stage company.

In thinking about exit-planning, it’s important to think about surviving long enough to exit. Farach points out four hazards that we need to plan how to avoid:

1. Failure to form and maintain a financial plan. This makes both planning and decision-making harder than they should.
2. Failure to be open enough to learning new domains/failure to know what our areas of ignorance are.
3. Failure to develop our people. This includes cross-training into other business areas so people can cooperate more effectively within the companies and so that someone being promoted or leaving doesn’t create a huge “hole.”
4. Failure to let people take control of their areas. In addition to giving them the appropriate level of authority and autonomy, it is important to support them in developing systems and procedures within their area.

How well are you doing at avoiding these hazards? If the answer isn’t “wonderfully,” what is your plan for doing better or getting help?

He says that in his many years of experience, the companies that have made it past the 10-million revenue mark have these four elements in common:

1. A compelling strategy that contains a clear value proposition to an identified buyer that explains why they will buy. I, myself, generally companies very early in their life-cycle; well before day one. So this is where most of my own day-to-day advising work is.
2. A plan for implementing that strategy. We also spend a lot of time helping with this.
3. Keeping the team aligned with the plan by repeatedly communicating it and asking each team member to think about what they will be doing to advance that plan two years in the future. He cites insufficient repetition as a common source of failure.
4. Relentless execution, execution aligned with the plan.

How well are you implementing these best practices? Again, if the answer is “not well,” what’s your plan for fixing it?

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