Last Saturday morning, I was making a quick breakfast for my 6-year-old daughter prior to running out to coach her 8 a.m. soccer match. As we ran out the door, I noticed I had six text messages on my cell phone. They'd arrived at 2 in the morning and were all from Matt Stewart — a dear friend who co-founded College Works, the country's largest residential and commercial painting company. He is a brilliant entrepreneur and a lovely family man.
He was in Cancun, Mexico, with several hundred people from his team at their annual recognition awards and had fallen down a steep flight of slippery stairs. The fall had snapped three of his ribs and punctured a lung, which was bleeding. He had also torn his shoulder muscles while trying to catch himself on the railing.
He was laid out in a hospital bed in a foreign country coping with excruciating pain, with no food or water, and worried about how he'd get home, whether he'd be OK and how his wife and kids would cope. Unlike most people, he had a shock plan: a clear sequence of events to be followed in case of an unfortunate surprise. Unfortunately, his planning never contemplated the complexity of being immobilized in a foreign country.
We can all be blindsided by scary surprises and they aren't usually conveniently aligned with what we prepare for. Given that we are in the midst of scary season, now is as good a time as any to talk about preparing for a shock to the system.
The big 3 shocks
No matter how conservative any business owner or adviser is, they must have a healthy grain of optimism in order to venture out on their own. That same belief that things will work out also causes many of us to ignore having a plan to cope when bad things happen (and they will at some point unless you are incredibly lucky).
As a personal business example, in our prior business we experienced an abrupt near-death experience; we lost almost a billion dollars in client assets seemingly overnight through a perfect storm of market swoon, mediocre performance and service slip-ups (which led to client outflows) in the late '90s. More recently, the 2008 50% market decline hit our firm in the midst of a massive expansion. Truth is, big, ugly surprises happen to every entrepreneur, but we are often not ready when they do. That is why I am a huge fan of creating a shock plan: a simple one-page summary of steps (like a checklist) to be taken should a major financial shock hit your firm.
The big three surprises that can kill any business, if not dealt with in the right way, are:
1. A revenue (or cash flow) decline
2. Key employee jolt
3. A client crisis
Let's discuss each of them and what you should consider when creating your shock plan.
1. A revenue (or cash flow) decline
This could come from the loss of a major client, a collapse in the market or even a big spike in spending that doesn't come with commensurate revenue. Entrepreneurs often avoid creating a budget that shows what would happen if cash flow fell abruptly. What changes would need to be made for the business to survive in adverse conditions? What compensation adjustments, workforce changes or spending freezes should be made at different revenue declines of 10%, 25% or 50%?
The approach we developed was to first freeze discretionary spending — travel, meals, nonessential projects and any high-cost initiative. Next in line are compensation adjustments — bonus freezes and even pay cuts (starting at the top). In the big recession, we cut pay for executives and senior management, but were able to keep everyone (except partners) in our local offices protected, though no bonuses were paid for almost two years. Our partner advisers, who are also executives of our firm, suffered through a decline in their income as well, due to a reduction in their local profits, and we had to provide short-term loans in certain cases. Some business executives prefer reducing head count in tough times but in my past two experiences, I have found the team rallies together if everyone suffers a little rather than a few suffering a lot — especially if everyone at the top of the organization shares the pain.
2. Key employee jolt
We have a personality-based industry. In a service business, a key departure can lead to a lot of assets (and revenue) leaving the firm. That can happen typically in two forms:
a. An unexpected death or disability: In one unusual situation, we had a dynamic and beloved adviser who was planning on joining us. As we were going through the conversion process, she had an aggressive cancer relapse and she died within weeks. Clients and employees were shocked, but also wanted to stay on a path they understood and trusted. We needed to find an adviser who would feel like a consistent fit, but in the meantime we had internal staff and resources allocated to assure clients and take care of their investments. We lost a few households, but we still have the majority of clients with us years later. The adviser's family was paid for the business we kept, even though it could have been a calamitous event for them without us. Having a plan to implement saved her legacy.
b. A competitive departure: We were approached by a large firm that had a good-sized wealth practice they wanted to sell. In the midst of discussions, a couple of the underlying advisers quit and openly started competing for the business (they had no non-solicit agreements). We immediately promoted the remaining advisers and increased their pay; we cut fees by 50% for the remainder of the year and gave a money-back satisfaction guarantee to all clients. We ended up losing only a very small portion of the business, simply because we had a shock plan for retaining clients in a tough situation. There was no panicked ad hoc response.
3. A client crisis
Typically, there is a lot of inertia with a broad individual client set; however, the two biggest threats are either a regulatory problem or a reputational attack (by the press or social media.) Fortunately, I have never had to deal with a regulatory challenge, but we gauge our reputation on traditional and social media all the time. There is an effective protocol we use to assess our response. It was loosely copied (and simplified) from the Armed Forces crisis response process:
• First, identify if responding fuels the fire or calms things down.
• Second, figure out if there is truth to what is being reported.
• If there is truth, accept blame and overcompensate for your mistake, then overcommunicate your response.
• If it is false, respond only if the rumor attacks the firm's reputation for integrity. Do so aggressively. Otherwise, accept that success brings attacks and laugh it off.
None of us ever plans to have something bad happen, and even with the templates we have, reality is usually more nuanced than the blunt-object approaches above. However, having a starting point to frame and adapt from is so much better than trying to craft a response in the midst of a crisis when emotions are at a peak.
My friend Matt got home at 4:30 a.m. on Monday. He might have been grumpy from the pain and exhaustion, but he was immensely relieved to arrive back in the U.S., reunited with the people who love him. He couldn't hide how grateful he was to all of his friends who came together to take care of things (nor could we hide how happy we were to see him home safely). Although he never imagined he'd need it, he had international medevac insurance. It changed his entire experience.
Having a plan, and cool heads around him to execute that plan, also helped his wife and kids feel protected and cared for. The shock wasn't exactly what he'd prepared for, but it set in motion a plan that worked. Your business deserves at least as much.
Joe Duran is chief executive of United Capital and author of “The Money Code: Improve Your Entire Financial Life Right Now.” Follow him @DuranMoney.
