When employees at the Jim Beam distilleries went on strike in October 2016, the company announced it was implementing “comprehensive contingency plans” to keep its facilities running. The strike lasted a week. Without contingency planning, the effects could have been devastating to the business.
No matter how big or small a company is, the ability to adapt to changing market conditions — and shift paths in the event of a crisis — is absolutely critical. For startups with less of a cushion in place, contingency plans can be the determining factor between explosive success and detonating all business prospects.
Starting out, entrepreneurs count on a great idea, solid business execution and enough capital to get the business rolling. And, of course, a little luck in timing the market’s needs never hurts. But running a business is always a gamble. Experienced entrepreneurs are the first to point out that business plans quickly become obsolete the moment they are written, given changing market conditions. The best advice for every startup is not just to expect the unexpected, but also to plan for it.
Plan A: Have a plan B
Entrepreneurs often feel like there aren’t enough resources for backup plans and put off contingency planning in the short-term. As a result, they find themselves relying on a combination of hope and luck when facing a crisis. This decision — whether conscious or not — can be fatal to a young company if things don’t go according to plan.
Spending time thinking about the “what ifs” is a good start, but it’s difficult to envision every possible threat and all the potential scenarios. Instead, focus on the company’s structure, decision-making processes and funding. Then, create plans and processes for what happens when these elements are disrupted. Knowing there are contingency plans in place helps keep the team calm and focused on keeping the company moving forward — even when unexpected twists put it on a different path.
1. Figure out the backup power.
In 2015, my business partner was in a serious accident that put him out of commission for a while, separating him from the business at a critical juncture for the company. Because of our cofounder structure, I was able to cover for a few months while he recovered, not just physically, but also emotionally. But it drove home how susceptible a business can be to unexpected health or personal issues. Without a trusted person to turn to in these situations, a business can quickly find itself in trouble.
Consider backups for key leaders in advance, and ensure they have all the tools necessary to keep the company running. Map out the scenarios that will trigger the contingency backups, what the duties are and how the responsibilities will be handed back following an absence.
The same goes for technical geniuses. While startups often don’t have the luxury to keep backups on staff, there are services such as UpWork and Freelancer.com that can help out in a pinch. In preparation, work with freelancers on smaller projects so that there are a few go-tos familiar with the code base who can step in in an emergency.
For more extreme situations, such as the death of a business partner, consult with attorneys who specialize in living wills, trusts and asset protection. It’s important to document what will happen with assets, bank accounts and stakeholders so the business can continue — even if worst-case scenarios occur.
2. Seek out “what if” funding.
Researching alternative funding arrangements in case something happens to investor funding is smart business, especially when the business isn’t cash-flow positive yet.
Early on at InList, we had an investor lined up and all the paperwork in place, but on the day the wire was to arrive, it didn’t. An unexpected delay with a foreign government prevented the transfer of the funds in the timeframe we needed. We turned to the emergency lines of credit we had set up as a contingency, which kept the company going until the investor funding came through. Without it, the shortage could have put us out of business.
Do the homework to explore options that fit, from factoring or merchant cash advances to traditional lines of credit. In addition, SnapCap, Kabbage and OnDeck are options that only look at the monthly deposits to business accounts without requiring a credit card merchant account and account receivables. It’s a good idea to go so far as getting alternatives set up and pre-approved.
3. Create a “just in case” budget.
Startup runways can be shorter than expected for a lot of reasons. One of the biggest mistakes founders can make is believing that, if they focus on managing what’s within their business realm and stick to a budget, they’ll succeed. External threats — such as new regulations, sanctions or geo-political tensions — are dangerous because they can arise seemingly out of nowhere to cut a company’s runway short.
That’s why startups should create two budgets. The primary budget works when everything — funding, traction and growth — happens as planned. The secondary budget should be a scaled back, necessities-only version to turn to in an emergency. Having it ready to go can be a lifesaver when a company needs to change course quickly and move back to fundraising mode.
4. Build the team, not hierarchy.
The team an entrepreneur puts together and the culture that’s created are clearly keys to long-term success. Nearly a quarter of this year’s startup post-mortems cite lack of the right team as the reason for failure. However, for contingency planning, startups also need to be vigilant about organizational set-up. Long chains of command with multiple people involved in decisions create confusion and delays when a key player is unexpectedly unavailable.
Build a dream team made up of diverse talent, but give equal emphasis to bringing on team players who will invest in working together toward common goals. Zappos, a company now famous for its non-standard organizational structure, has been thriving under its new model. A flat hierarchy and a decision-driven culture help to eliminate some of the biggest risks a young company can face in unanticipated situations.
Having contingency plans in place won’t solve all the challenges when the unexpected becomes reality. But they can give a startup the time and cushion it needs to pivot and survive.