Beginning with the End in Mind

“Begin with the end in mind.”  This is Habit #2 of Dr. Stephen Covey’s famed 7 Habits of Highly Effective People.

Covey explains that this habit is based on the principle that all things are created twice — once in your mind, and then in reality.

Other scholars note that strategic thinking is a process of projecting forward then reasoning backward.  Projecting forward is determining the end that you have in mind.  Reasoning backward is figuring out what must be in place right before that end, and before that, and before that, etc. back to the present.  Covey would refer to projecting forward as the “leadership” part of beginning with the end in mind, and reasoning backward as the “management” part.

Arena Capital Advisors deals with the end of the lifecycle of business ownership for private companies.  This “end” is therefore also the beginning of ownership for the next owner.

As human beings, it is an indisputable fact that we are not going to live forever.  Father Time is undefeated.  A lot of planning can go into the end of our lives.  We might need a cemetery plot, life insurance, long-term care insurance, a will, a living will, a health care power of attorney, a general power of attorney, perhaps a trust to hold certain assets, and may want to select music or who will speak at our memorial services.  Poor planning leads to all sort of problems and family squabbles.

For business owners, it is an equally indisputable fact that you are not going to own your business forever.  While the nature of business exit planning is different from end of life planning, the need is similar.  When we evaluate an offer to purchase a business, we start by looking at five attributes:  Price, terms, structure, timing and certainty of closing.  We can then add a sixth, more qualitative attribute:  What will this buyer do with the company after they take ownership?

The best and easiest transactions come when there is alignment between the business being sold and the objectives of the buyer.  When you develop a business exit strategy, you will develop an understanding of different types of business buyers or even specific potential buyers.  If this is an ongoing process, it becomes possible to begin molding the business into the image of what the most likely buyer would covet, for which they would offer the best price and terms. When you think of major business decisions, it can be useful to consider how the likely next owner might prefer the decision be made.  For example, if you are evaluating new accounting software and have narrowed the choices down to three equally attractive options, and you believe the most likely buyer is a competitor who uses one of these options, that might sway the decision.  You would be making that buyer’s due diligence and post-closing integration easier, which helps when you are negotiating for a higher purchase price.

That’s strategic decision making.