In Search of an Exit Strategy

“The role of the CEO is to sit on the side of the hill eating pizza, drinking beer, and having people bring him reports.”

This was said to me a number of years ago, only half in jest, by Chip Johns, Co-Founder, President and CEO of Vanguard Sailboat Company in Portsmouth, RI. He contended that until you were able to separate yourself from the daily fire-fights of operations, you wouldn’t have the space to focus on the critical strategic issues that would lead to a successful exit.

After 15 years of building his company into the largest small boat manufacturer in the U.S. – in part by an acquisition of the Sunfish and Laser brands – Chip achieved separation. But he wasn’t ready to sell. He left Vanguard in the hands of his managers and took off. Together with his young family, he spent six months sailing in the Caribbean, searching for the best pizza and cerveza (not!), and receiving periodic reports from the Company at his various ports of call. The Company did well in his absence.

On his return, Chip resisted the temptation to dive back into operations. Problems that had been solved by his managers during the previous six months could still be solved by the managers. Short-term opportunities could be pursued by the newly-empowered staff. Chip still had the separation – the space – to be an effective CEO, focusing on developing a long-term strategy for selling the Company. With monthly input from a three-person advisory board, Chip set about moving toward the exit by…

  1. Articulating a realistic Vision: What does my company have to achieve in five years to make it an attractive acquisition candidate at a premium price? What’s the goal for revenue and EBITDA?
  2. Creating the destination org chart: What does this company look like organizationally in five years with 2x revenues? In what slots will we need new people with new talents? Where will we find them?
  3. Developing and nurturing the management team: Who are those who will be inspired to build a great company? Who will fall by the wayside?
  4. Determining the right product offerings: What will be our major money-makers in five years? How can we determine this? What will be the competitive landscape? How do we identify and develop winners?
  5. Discovering and integrating two complementary acquisitions: How do we accelerate the growth of both the top and bottom lines? What is involved in melding corporate cultures?
  6. Providing the financial resource: How fast can we grow on internally-generated cash? How else can we fund our growth?
  7. Accessing the market: How will we figure out and get ahead of the sales and marketing curve in our industry? What trends are just surfacing today that will be commonplace in five years?
  8. Ensuring excellent execution: Do we have policies and procedures in place to provide a solid basis for managerial accountability? What additional measurements will promote top performance?
  9. Developing a compensation strategy: Who deserves the biggest rewards? What’s the right balance between salaries, incentives, and stock? What will it take to keep key people on board?
  10. Identifying the likely acquirers: Who’s buying? Who’s expanding? Who’s on the outside of our industry, looking to get in? How do we establish and maintain connections with the likely players?

Five years to the month after his return from the Caribbean, Chip successfully negotiated the sale of Vanguard at the top of the market in 2007. So is he now sitting on the side of the hill, eating pizza and drinking beer, and wondering why no one is bringing him reports? Far from it: he’s in the due diligence phase of the acquisition of another manufacturing company, planning to build that company in the same way he built Vanguard – though presumably with a strategic plan that involves neither the Caribbean nor drinking beer.

Alligator Bites

In 1983, Professor Neil C. Churchill with Virginia L. Lewis wrote a seminal article in the Harvard Business Review, The Five Stages of Small Business Growth, stages which he identified as Existence, Survival, Success, Take-off, and Resource Maturity. Despite the passage of 28 years, many of his observations of Stage IV, the Take-off, still apply. To wit:

“In this stage the key problems are how to grow rapidly and how to finance that growth. The most important questions, then, are in the following areas:

“Delegation. Can the owner delegate responsibility to others to improve the managerial effectiveness of a fast growing and increasingly complex enterprise? Further, will the action be true delegation with controls on performance and a willingness to see mistakes made, or will it be abdication, as is so often the case?

“Cash. Will there be enough to satisfy the great demands growth brings (often requiring a willingness on the owner’s part to tolerate a high debt-equity ratio) and a cash flow that is not eroded by inadequate expense controls or ill-advised investments brought about by owner impatience?

“The organization is decentralized and, at least in part, divisionalized – usually in either sales or production. The key managers must be very competent to handle a growing and complex business environment. The systems, strained by growth, are becoming more refined and extensive. Both operational and strategic planning are being done and involve specific managers. The owner and the business have become reasonably separate, yet the company is still dominated by both the owner’s presence and stock control.

“This is a pivotal period in a company’s life. If the owner rises to the challenges of a growing company, both financially and managerially, it can become a big business. If not, it can usually be sold – at a profit – provided the owner recognizes his or her limitations soon enough. Too often, those who bring the business to the Success Stage are unsuccessful in Stage IV, either because they try to grow too fast and run out of cash (the owner falls victim to the omnipotence syndrome), or are unable to delegate effectively enough to make the company work (the omniscience syndrome).”

Draining the Swamp

“If they choose to do so, most of the top small business credit card issuers can still subject customers to rate hikes on existing balances, double-cycle billing, and other practices barred from personal credit card agreements under the two-year-old [CARD] reform law. That’s according to a recent survey by Card Hub, a credit card comparison website.

“Of the nine largest card issuers surveyed, only Bank of America gives small business cardholders the same protections now required for consumer cards under the CARD Act. Even though most small business cards are personally guaranteed, affect borrowers’ personal credit scores, and function like consumer credit cards, the law does not apply to business credit cards.”

Source:, The New Entrepreneur, May 4, 2011