How important is a business exit plan?

25 Apr, '16

What’s the average life of a business?

I don’t know for certain, and I doubt anyone else in Bahrain or the Middle East knows either. Statistics of this sort are just not prioritised, and if they are, then they are not published. US statistics suggest that, on average, a Fortune 500 company lasts around 40 to 50 years. The vast majority of small businesses in the UK are around 5 years old, with less than 15% older than 20 years.

My guess is that small businesses here actually last a lot longer. But that’s not due to their success.

Businesses last longer in this region not because they are better run, or because of the region’s tax-free environment. I suspect that they are allowed to grow older simply because of the archaic bankruptcy laws. The bankruptcy laws here compel business owners to maintain their businesses on life support and even tolerate incurring losses, rather than declare bankruptcy.

You would be right to question why bankruptcy is detrimental to business and entrepreneurship. One reason is because there are serious repercussions from declaring bankruptcy. Those repercussions range from travel bans imposed on entrepreneurs, to them being barred from starting or operating a business thereafter.

Simply put, bankruptcy laws make this region a hostile environment for entrepreneurship and innovation. I don’t believe that business can thrive under these restrictions. Innovation carries an inherent risk of course, and an environment such as this doesn’t allow innovators to take those necessary risks. That is probably why innovation in this region will continue to just be another buzz word empty of meaning.

You can read the Bahraini Bankruptcy law here.

And here’s an excerpt to show you how detrimental it is to innovation and entrepreneurship:

Article 33

Any adjudicated bankrupt may not elect or become a member of parliament, municipal council, Bahrain Chamber of Commerce and Industry or any professional society. He may not become a manager or a director of any company nor carry on the business of commercial agency or any import and export business, stockbrokerage business involving the sale or purchase of securities or sale by a public auction.

An adjudicated bankrupt may not manage properties on behalf of other. However, the competent court may authorise him to administer the properties of his minor children, if such administration is not detrimental to them.

This archaic law is responsible for the stagnation of business and innovation. A significant proportion of businesses here are on life support. And to all intents and purposes they should be declared dead. Yet, they’re kept alive because their owners cannot afford to declare them bankrupt.

I’m not advocating escaping from one’s responsibilities. I am advocating a better law that allows for mistakes to be learnt from. They must be regarded as experiences that help build the culture of innovation.

The above should give you some context on any published statistics here as they do not take these factors into account. They do not present the real situation and statistics should taken with some grains of salt.

Other challenges do exist that limit business growth, of course. The most critical I believe are the lack of clear planning and lack of vision. A critical part of those is that entrepreneurs here do not define a clear exit plan as part of their business planning. I am guilty of that omission, I confess. I’ve never even thought of an exit plan before not found a need for one. However, I now believe that defining an exit plan is critical to the success of any business. It is the exit point at which the conditions are just right for the launch of a phase of more predictable growth. Essentially, it is the transition point from an entrepreneurial spirit to professional management. It is that time at which professional managers must be brought in to manage and create sustainable growth.

Most entrepreneurs, from my own observation, aren’t detail people. They are explorers who have no fear of venturing into dark and deep shark infested waters. One would find them getting out with hardly a drop of sweat on them. Wet they might be, but sweaty they won’t. What would make them sweat is the wait, and being forced to deal with the fine details.

But with a such a hostile environment to entrepreneurship here, how can a business even contemplate the prospect of being sold? Would an exit plan even be considered as part of business start up? Why are businesses even started in this region?

I believe that the primary consideration for starting a business here is to make money for the owner. A piggy bank, if you like, or a cookie jar to dip the hand in whenever required to maintain a certain lifestyle. In the majority of cases, businesses here aren’t to deliver value through innovation. And that is why businesses remain small.

I am not being judgmental. These are simple facts that small businesses and their entrepreneurs live by here. I contend that there is nothing wrong with that situation. But would the term “entrepreneurship” really apply here?

In this environment, what kind of businesses get sold and why? For how much? And in what conditions? And to what effect? Yes, businesses do get sold. Rarely mind you, but they do happen.

One such recent transaction I know of is the sale of the Block 338 restaurant. The Gulf Hotel purchased that property for a rumoured two million Bahraini dinars. Can you imagine how a study like this would help entrepreneurs? At least it would encourage entrepreneurs to develop a road map with exit plans as part of their start-up process. This would force entrepreneurs to focus on business sustainability. And invite them to establish processes that ensure business success. These kind of stories would do more good than empty marketing platitudes.

I’ve alluded to some factors that would make a business sellable above and I do believe that those are the common denominators that work across many – if not all – small business types; be they service or product based.

Other factors do exist including market need, share and timing. But having a documented processes is arguably the most critical. Those processes allow the business to transcend its owner. They offer predictable automation that allows the business to function regardless of the involvement of its creator. That intellectual property surely must be the most important thing a business possess, regardless of its genre. That applied equally to the likes of video production houses or manufacturing facilities.

Investors; however, make it plain that while IP is valued, it does not factor much in weighing a business for an investment decision. They put a price on actual equipment the business owns than its intangible assets. That makes IP a component of good will, rather than a critical business asset. This thinking renders service-based businesses worthless for an investment destination.

How can a service business such as mine grow then?

I remember attending a seminar by Carl Gould organised by the Entrepreneurs’ Organisation in Bahrain a few years ago. He identified the seven stages of a business.  What stuck in my mind is his assertion that businesses that depend on their owners for success will never grow beyond “Level 2”. He argued that those businesses do not scale, but are bound by the intellectual input of their creator. The only way those businesses can grow would be for those businesses to grow beyond their creator. Which makes sense. And depends on setting in place processes where a diverse knowledge base and shared across the organisation.

That is the issue I have been struggling with for some time now. Like other entrepreneurs in my situation, I had been looking for a “mini-me”. I have not come close to finding one that could fill my shoes, yet. I understand that the alternative is to delegate and accept that I might have to spread my competencies across several employees. The issue here – and I realise that this might be an excuse – is that the market here in Bahrain cannot support and increased head-count. I tried that approach and failed. Many times.

Could scaling be an answer? Should one open offices abroad to grow beyond Bahrain to capture more business? That growth will surely provide the opportunity to utilise more competencies and spread them across the network.

What’s the issue then? Why have I not take those steps to grow? The simple answer is that I never had the required access to capital. The perennial problem of business growth everywhere, of course, but especially to those in Bahrain.

Trust for small business and entrepreneurs here exist only in platitudes and effervescent glitzy entrepreneurship events. There is no real government policies which help ease this situation. The archaic bankruptcy law is just one example of that failure. The absence of reasonable financing is another. Until these situations are remedied, I believe that SMEs in this region will continue to be non-effective. Their economic impact will remain marginal. And they will never provide real value that might benefit humanity.

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