A Black Swan event like Covid-19 can destroy our faith in our ability to plan. As its aftershocks continue to reverberate throughout the global ecosystem, it is easy to focus on short-term, tactical outcomes. But that feeling is akin to relying on a minuscule chance it will rain, which complicates proceedings, during a motorsport race as a reason to go into the race unprepared. All stakeholders of our company deserve an effective plan despite the effort of creating and maintaining one.
Mergers and acquisitions activity creates the biggest distraction for any company from focusing on running the business and creating customer value. By September 2021, we are already on track to break all historic Mergers and aquisitions records with $4T worth of deals already on the books. Mergers and acquisitons, by definition, are inorganic and mask the underlying fundamentals.
Looking ahead to 2022, it is important to frame the purpose of every company. Every private company must start planning with this question in mind:
Do we plan to run the business as an organically growing entity for the foreseeable future, or do we plan to exit in a reasonable time horizon?
I have seen many companies try to play both sides of this answer without making an effective choice. Often, the result is stalling organic growth because of limitations in quality of offerings, and eventual exit at a diminished value where the company is a pale reflection of its best days. Make a choice. As difficult as it may be, it is impossible to pursue both paths effectively. Like anything else in life, half measures don’t end well.
The Exit Choice
Anyone who owns an asset will want to ensure that it is liquid. For a private company, exiting serves this purpose. Early shareholders want the option to liquidate their assets. This is logical. But an exit changes a company. Many with short-term incentives selfishly view exits as the end. However, an exit is simply a transfer of ownership. Without a tangible future beyond transferring ownership, why would the new owner ever partake in such a deal?
Bankers and lawyers have the deal making side of exit planning down to a process, but the strategy and operations side is not a science. The fate of operations post-exit is often tackled on the fly. But it is important to go further. A business exists only because the customers bought its offerings. Employees execute processes every day. Every company has several partners that enable its value creation. These stakeholders’ fate looks different for the three common exit paths beyond papering the deal.
Listing the company’s shares on a public market changes growth and profitability expectations. Operating based on decisions by a few private owners shift to living in a fishbowl where many public owners make spurious ownership decisions based on divergent interpretations of public information and opinions. Listing on a public exchange as a standalone company is the least disruptive exit path both strategically and operationally. Exit planning for public listings largely focuses on shaping the company’s strategy and operations to be ready for mass market scrutiny prior to listing, as opposed to post-exit efforts. The key guiding question for this path is:
What is the most value creating version of the company that can be an attractive public investment source without setting undeliverable expectations?
The alternative path is a secondary private ownership hand-off, which implies that the company remains private where a new owner feels that they have a better approach to create value than the current one, which could be a group of venture capitalists, a founder operator, or a private equity firm. This second path often implies more radical strategic and operational shifts post-exit than a public listing because the new owner often has a new purpose in mind. The question we must answer here is:
What are the priorities that maximize the value of the company to a new private owner while preparing the existing stakeholders for such an owner’s incentive?
Strategic exits, where a company is acquired by another, has the biggest strategy and operations impact and stakeholder disruption for the target. The acquirer often has a very specific reason to buy the target at a reasonable value. The reason might be to acquire a part of the target’s intellectual property, to get access to the target’s customers quickly, or to take over specific talent that the target has. However, almost never is it all the above. Elimination of competition is another reason that renders most of the target’s operations worthless. So, it is important to ask the question:
What will happen to the non-value creating or duplicative parts of the company after a strategic exit?
Regardless of exit path, the right thing to do is to have an effective exit plan. If a company’s near-term purpose is to exit, the next strategic plan is an exit plan. There is no law against making a backroom deal where an announcement is made that benefits a few. But for ethical reasons, it is important to plan an exit covering preset expectations of all owners, customers, employees, and external partners and to reset expectations if misalignments exist. Historic lagging indicators and marketing messages rarely reflect the future after an exit.
Exit planning is a comprehensive topic that deserves much more discussion which we will dive into further in a later publication.
The Operate Choice
The alternative to an exit is to operate the company organically.
Now, let’s assume we have decided to focus on running the company. An effective strategic plan is our 2022 script. There are good and bad scripts. Are we going to direct 2022 operations with a well-written script like HBO tends to use for content creation? Or are we going to let 2022 operations be run based on a trailer and a shiny idea like Netflix?
My Labor Day weekend volleyball team kept yelling RESET to rally the group when several points went against us. It’s the right mindset, but we still lost ten out of eleven games and failed to change our trajectory when our backs were against the wall. The team had the talent to win. But we didn’t arrive at a winning team formation and game plan that matched our strengths. A desire to reset must be complemented with a tangible script that dictates approach and execution.
Regardless of industry and growth trajectory, every company needs a holistic reset after the last eighteen months because externalities are distracting everyone. Through the rest of our 2022 strategic planning series, we will cover a few general themes that every company can consider during planning. For now, let’s frame what good looks like.
Strategy is often incompletely explained as a decision to take a castle. Why would anyone independently bother taking a castle? We are annexing a castle because it serves a purpose. A castle could enhance the standard of living or offer more security for our current territory. In this analogy, our strategy is the choice to operate as a united territory that includes that castle we haven’t yet acquired and live in a state where we have incorporated the spoils from that castle into our existing territory. In this construct, a strategic plan must include three critical parts.
- Articulate who is part of our army and how our army will take that castle.
- State how we run our existing territory and who manages the territory while our army takes the castle.
- Frame how our territory runs better with the inclusion of the castle.
Unfortunately, most planning efforts do not account for all three parts. If we focus on the army, activities in our existing territory fall by the wayside. The army will never take the castle if we focus too much on our territory. If we don’t integrate the territory and the castle, why did we bother taking the castle in the first place?
In this analogy, the current state of our company is the existing territory. The expanded territory after we integrate the castle is our evolved company after we achieve our strategic choices. The territory administrators are the resources that perform our ongoing operations and supervisory tasks and uses our operations investment. Our project resources, their supervisors, and investment in improving our offering are part of the army.
Evolving our company is a vastly different endeavor than operating it in its current form. Planning must cover both, along with how the evolution intersects with current operations.
If we intend to operate our company as a standalone, profitably growing entity, the strategic plan must dovetail this entire storyline. Far too often, strategic plans state wishful outcomes and little about a path to get there. Every employee, supervisor, and executive deserves an effective plan to work from.
As you kick-off your 2022 planning efforts, start with an "exit vs. operate" choice. It determines whether your strategic plan is an exit plan or an organic growth plan. If former, build an exit plan that aligns with your likely exit path to maximize shareholder value and optimize stakeholder impact. Alternatively, create a strategic plan that covers all three legs that we discussed above to operate the company.
In the next edition of this series, we will discuss the first strategic theme that every company focused on organic operations must consider through 2022 planning.