The reading level for this article is Novice

Entrepreneurs are people with a vision so strong that nothing you say could dissuade them from moving forward with their idea to build a successful business.

But if they want to enter the game, they better know how to exit it, too.

One of the most important pieces of any start-up’s business plan is its exit strategy. Many entrepreneurs have been taught that the plans are mainly for investors, who want to know how to make a decent return or pull their money out of a sinking ship. In reality, the most important reason to have an exit strategy is to demonstrate to yourself, your management team and your employees your vision of where the company will head and how you plan to achieve those goals.

I was involved in a start-up several years ago that turned out to be a successful company — but not without some hard lessons learned along the way. Many of us had worked together at another company and wanted to build a business. We liked each other and wanted to incorporate knowledge gained from our work experience.

We were brought together by some investors who had seen our previous teamwork; our former company went public and left them satisfied with their returns. When the start-up’s founders asked for assistance in reaching their business’ growth potential, the investors asked if we would step in to help.

Together we developed a new business plan with an exit strategy built around going public within three years as long as both market conditions were favorable and we had two profitable previous quarters.

Management recognized that the start-up’s employees were its most important assets, so from the very beginning we did everything to empower our team. From our past experiences we knew that the key was to provide them with as much accurate and up-to-date information as possible. One of the ways we accomplished this was by having monthly luncheons (at an inexpensive Chinese buffet) that all employees were expected to attend. Every officer presented the same reports, which the next day would be presented to our board members. We each informed them of what our departments were planning to do and if we met the plans from the previous month. Our meetings were then opened to questions as well as suggestions from all employees. Each officer was expected to answer truthfully any question from any employee.

We never gave any thought that we would be unable to exceed our three-year plan and certainly never thought of laying off any employee. For two years everything went better than we planned.

When the time had come to go public, every employee had options he or she had earned over the previous two-and-a-half years. Everyone was aware of our requirements of two profitable quarters before the offering was made. All employees were doing everything possible to cut expenses.

Their effort still wasn’t enough to help us reach our goal. I remember clearly the day our management team realized the start-up wasn’t going to be able to reach its profit goals in the last quarter (the one just before going public). We discussed all of our options and labored over them well into the night. Financial models were developed over and over with great care. And then the painful decision was made: All officers would reduce their pay by 50 percent, and layoffs were required.

We presented the plan to employees the next day at the company’s monthly luncheon meeting. Our president explained that those who would be laid off would receive unemployment compensation. He also told them he expected the layoffs to last three or four weeks and that he expected to be able to call them back to work at that time. No one would lose his or her stock options as a result of being laid off. The president further explained that the reason for the problem stemmed from dealings with one of the company’s vendors. Sales were on target, we had a strong backlog of orders, and the management team had accomplished every part of the plan except shipments.

The workers asked several questions about the methodology we used to determine who would be let go. We explained how all the officers had spent several days listing every criteria such as seniority, job skills, overall experience. The employees seemed to accept that we did the best we could under the circumstances.

We also advised them that their managers would be meeting with those being laid off to explain everything in more detail. Many were part-time workers — women who worked while their children were in school. Others were full-time employees in positions that weren’t critical to the execution of our business plan. In most cases, their stock options were worth a year’s salary.

One week later we held another company meeting to allow the employees a chance to express their feelings about what had happened. To our amazement, each one thanked us for our openness and honesty. I think our clear communication and mutual respect for each other was a significant factor in their decision to return to work when, as promised, they were summoned back three weeks later. Eventually, the company did go public, and it grew stronger.

Tim, the lessons I want to pass on to you and other entrepreneurs are about the need to develop a plan that matches your vision. Share the plan — and that includes the company’s exit strategy — with all employees. Have meetings where all employees are able to speak without fear of retaliation. Hold people accountable for their responsibilities.

Not all companies are required to go public or be sold; other exit strategies could be to buy back stock from the investors and take the company private. Many companies are very successful, privately owned businesses. Develop your management team with as many qualified people you know from previous business experiences. Add managers who have a clear understanding of your vision and share the same value system as you. Investors like to invest in people they know.

When business goals are in danger of being missed, it is management’s responsibility to act swiftly and to identify those areas where savings can be achieved. If this means laying off employees, it is important to inform both those being laid off and those being retained of the company’s plans. I can’t stress enough the importance of keeping employees informed about a company’s progress because I know firsthand what that does to boost morale.

Openness and respect are the keys to making it through difficult times.

This Business article was written by Jerry Mitchell on 2/11/2005