A start-up with initial success starts spending money like a drunken sailor until the money quickly runs out and all the investors are surprised. Sound familiar? Instead of gaining initial momentum and consolidating a position, the founders put the train engine on full blast headed down the tracks without having tested the brakes or fully mapping out the route. Often in no time they spend all their dry powder and they're left wondering what happened and where do we go from here. It's easy to get excited about a project or a new venture especially when positive feedback comes in the initial rollout of the marketing effort. Entrepreneurs start to feel invincible. Sometimes egos take over preventing sensible decisions based on rational analysis, risk assessment and careful management of the cash position. They end up on a runaway train with nowhere to go but a crash at the end of the line.

I have found in my past experience that new ventures and the entrepreneurs who run them are generally pretty cautious with the planning, but the business takes a whole new level of seriousness once initial capital is in the bank account. Plans sometimes change for good reason but the budget and timing impacts are often left to the side in favour of higher priority activities. The plan was apparently good for raising the money but that was its sole purpose. Move over accountants and finance weenies…we now have to get on with the real work. You generally only get one shot at commercializing…or accelerating the train down the tracks. If you screw it up, there is usually no turning back. There's just trouble and mess ahead with a lot of effort at the end of the line to clean it up.

I am falling on my own sword here as I too have been on a runaway train a few times in some of my own entrepreneurial ventures. I subscribe to advice in a quote from Steven Denn, “You can never make the same mistake twice because the second time you make it, it's not a mistake, it's a choice.” However, I don’t always follow it myself. Shame on me. Nobody’s perfect and it’s easy to get caught up in the hype of a great story. In some past positions in my career as a CFO or controller, I have found myself in the position of being the conscience of the shareholder, holding the feet of the enthusiastic CEO by a rope (like holding on to a hot air balloon) in attempting to keep the company grounded and on track with a logical pre-planned spending. Companies need all kinds of people to make them successful. One of those types is that CEO or promoter with boundless energy and enthusiasm. If not for them, the idea would likely never have got off the ground.

As a rule, before you take someone’s (“someone’s” includes your own) money for your venture, you should have a plan for the money that in fact gets you to a finish line of commercialization…not half way to your destination. Rationing your cash flow doesn’t sound very entrepreneurial, but it is a necessity for any cash-constrained start-up venture. Better safe than sorry. Find the next lily pad to jump to. Find a spot if you can that gets you to cash flow self-sufficiency if you can and then map out a path from there. Go big or go home works well in movies or for the small minority of companies for which that strategy has succeeded. Bear in mind that somewhere between 15 – 50% of start-ups fail in the first couple of years (…the public research on this data point is all over the map). I am a financial geek, so it is my proposition that you should at least get the critical part of sufficient capital rationalization right at the outset. There are enough other risks to worry about that are out of your control. You should not need to expose yourself to full-on financial risk of runaway spending.

This is not a call out to stop being a high risk-taking entrepreneur. I merely suggest that if you are fortunate and talented enough to find money for a start-up, you should take the effort and responsibility to make it last long enough to meet the objective established for that money. I don’t see anything wrong with spending money quickly in accordance with a well thought out defined plan to reach a goal that all involved have agreed to. That is just entrepreneurs being entrepreneurs. The unforgiveable circumstance is when the money is not controlled and trickles out or is shovelled off the back of the truck in great volume without a plan …or alternatively without a corrective action plan when things significantly change.

If you are musically stuck in the 1980’s like me then here is a bonus offer. I dare you to not listen to the entire live version of AC/DC performing Rock N Roll Train (Running Right off the Tracks) (from Live at River Plate) on YouTube. I warn you though, if you are like me, the chorus “runaway train, running right off the tracks” sung by the band and the enthusiastic Argentinian crowd will rattle around in your head for days and you won’t be able to get rid of it.

A feature article by Dwayne Coben of Coben Advisory Inc. (www.coben.ca). Coben Advisory is a specialized corporate & executive advisory firm that offers services to help our clients plan, improve, grow and/or exit their businesses.

Common questions I get these days from business owners are “should I sell my business now before things get worse or should I hang in there until things improve? Or is there a reasonable plan C or D involving succession or transfer of the business to my kids or key employees?” These questions usually have a timing (when?) and a structural or process (how?) aspect to them. The questions probably should be expected more often given today's current economic climate coupled with the growing bulge of baby boomer entrepreneurs. The answers to when and how are of course related. The alternatives and potential outcomes often appear obscured at first glance. The “best” answers most always hinge on what does the owner want.

In a beautiful magical Disney world of perfection, the answers to these questions are nicely laid out in a book sprinkled with pixie dust entitled “My Exit and Succession Plan” which sits neatly on the owner’s bedside table…providing for a wonderful peaceful sleep at night. In the real world, however, these answers are most often unknown, unexplored and filled with anxiety and stress for an owner who is consumed with keeping successful business operations on the rails. Research well documents that the majority of business owners that are reaching retirement age in the next 3 – 6 years do not have a plan for when and how they will “leave” their business, monetize or transfer their investment, or retire generally.

In my experience, the how question is less clear and more hair-pulling for an owner than the when question. A determination of how you wish to exit or transition your business usually precedes the timing question.

I believe there are often several fundamental and valid reasons for an owner not planning in advance for “leaving”:

Too busy right now…will deal with it later
Might stir up family or personal issues and requires emotional investment to decide
Don't want to admit they don't know and don’t know who to talk to about it with
Afraid the value of the business is not enough for their needs
Don't want to deal with retirement...or death…or the reality associated with either

I have sometimes asked friends and clients why they have no such plans or plans to develop a plan. What I’m often told is that it is all very complicated and whenever they start to think about it, all the see and hear is NOISE!

So what is the problem with not planning in advance for an exit or a succession? Well the simple answer is that unintended or unexpected bad things might happen due to personal circumstances outside your control, leaving you little or no time to react. Personal circumstances may cause a shortcut to forced retirement or exit (voluntary or involuntary) earlier than expected. These personal circumstances may be the result of sickness, marital issues, new-found preference for retirement, change of heart or any variety of other reasons…including death. “Bad things” might include obtaining a lower value for sale of the business, incurring significant taxes that may have been avoided, finding no successors when needed, or leaving festering family problems for the executor to handle.

I believe that owning a business while nearing the need for exit or retirement without a plan to do so is like being strapped to the railway tracks watching the oncoming train without the ability to get out of the way. The closer the train gets, the fewer alternatives available and the greater the stress. The decisions do not get any easier with pressure. The consequences of the train are unavoidable at some point.

Planning doesn’t stop bad things from happening. It may bring peace of mind, less taxes, higher valuation, reduced stress at time of exit and greater chance of smooth exit and future success. I encourage all business owners especially those nearing retirement to be clear and explicit about their eventual exit and succession plans. If they don't have an expert on the topic in their circle of friends, family or business associates, then I suggest finding an independent trusted advisor to help them. There is no shame in seeking an expert for something critical in your life that you are not familiar with. Even Phil Mickelson has a swing coach. You don't think Phil knows the game of golf better than his swing coach? The reason he has a coach is to be able to see and advise on the things that Phil can't see.

If you are a business owner nearing retirement or the desire to sell or transition your business and have not planned for that event, you may not feel the straps on your arms and legs holding you to the tracks but they are there nonetheless. I encourage you to develop an exit or succession plan that accommodates your objectives and begin working on what you need to do to so that you are not scrambling last minute. Those objectives may change and your plan may need tweaks or changes. Bad things may still happen but you will be more prepared and may avoid some bad consequences. Good things may happen too. But get off the track!

Start-ups on a Runaway Train

Exit Strategy Dilemma: Should I Stay Or Should I Go… Now?

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