Armanino Blog

Why You Need a Backup Plan for Your Business

by Michael Hogan
December 28, 2017

Business leaders are generally extreme optimists. In order to grow a company, they have to believe their business plan and products are going to be successful. This optimism can be a disadvantage, however, when a company experiences challenges. As a business leader, it's important to identify these challenges early and have a backup plan. Your role, when your company is faced with certain hurdles, is to maintain optionality though effective backup planning.

Don't just focus on the home run

When warning signs start popping up in your business, you might foresee an ideal outcome that would solve everything. For example, you think you will be able to raise financing or close a major client before you need to make drastic changes. Hopefully, this is exactly what happens.

The problem arises when you make this best option your only option, because you are so sure it's going to work. If things don't happen as expected―which we see all too often―there might not be enough time or money left to pursue a backup plan.

Imagine you're driving a truck and you can see that the bridge is closed three miles ahead, but construction workers are making repairs. Sure, there's a chance they could be done in time, but the smarter plan would be to take your foot off the accelerator and start looking for turnouts, just in case.

Research your options

During a difficult stretch, you should be looking at alternatives while you keep working on your ideal outcome. For example, if you only have a limited time to raise new financing before you are out of cash, you may also want to start the preliminary stages of pursuing a business sale.

This could mean making a list of your competitors and other companies that could move on a purchase. It might be too early to make calls, but you could research the market to understand whether a sale is possible, and at what price. This way you've laid the groundwork and will be able to move more quickly if your financing falls through.

Or, if you're targeting a huge deal in the future, there may be ways to close smaller projects in the meantime. For example, if you are launching a new product in 18 months, can you come out with a "light" version in six months? Some early income can buy you valuable breathing room to manage unexpected difficulties.

When do you need to start planning?

The right time to start looking at backup plans depends on your company and industry. What's the least amount of time that you need to pursue an alternative option? If you figure it would take 90 to 120 days at minimum to sell your business, you don't want to wait until you only have 15 days of cash to start researching candidates.

Six months of cash runway is a good general time to start planning, but this can be higher or lower, depending on your business. If it takes you 18 months to secure a large customer, you need to watch for warning signs of trouble and figure out alternatives much earlier than a company that can close sales in three months.

In addition to considering alternative strategies, you should also be looking for ways to make your current resources last longer. You need to take control of your working capital and stop spending as if it were a normal stretch. It might be time to hold off on added expenses like hiring staff or implementing a new research program. Or maybe you could lower your inventory until things turn around. Being more conservative now will extend your timeline and keep more options open.

Get an outside perspective

As you plan alternatives, it helps to get an outside opinion. A third-party advisor can give you a realistic view of where your business stands, what your options are, and what steps you need to take to improve. They can be more objective because they don't have the same personal connection to your organization as you and your staff.

They can also help you understand broader market conditions. For example, maybe you didn't realize that two of your competitors launched a similar product and failed. As a result, getting financing or selling your business will be more difficult than you expected. Using a third party can also help you manage the expectations of current lenders or investors.

When you're facing difficult times, you need to stay confident that your business will be a success. But being confident doesn't mean you shouldn't prepare for trouble. By planning ahead and laying out some alternative strategies, you can prevent a difficult stretch from sinking your company.

Find more helpful insights for financially distressed companies from Armanino's Restructuring team.

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