Facing An Existential Crisis?

This’ll be a rough post to read, so if your firm is doing great, or hanging in there and not losing ground, you can just skip it…or maybe forward it to a friend who may be experiencing an existential crisis with their firm.

Who This Is For

That’s what this is about. Not the normal ups and downs that every firm experiences (including mine way back when), but if you’re at a place that’s new to you, possibly scary, and you find yourself wondering if the damage might be fatal, this is meant to cut through the confusion and give you some guidance.

I honestly hate to write about this stuff, but I keep hearing of firms who are closing, and it hurts my heart. The reasons seem to be a combination of:

• Clients who are cautious to spend, and when they do spend, are taking a longer time to decide and then viewing many normal initiatives as too risky.
• Staffing up after the pandemic did not kill their business like they thought it would, and then not adjusting quickly enough when they discovered that those better times were not the new normal…but were in fact an aberration.
• The pullback in spending from specific industries after their own pandemic impacts were not sustained (e.g., SAAS and ecommerce).
• Fears over the commoditization of content, dev work, and SEO. And maybe even SEM.
• Losing that big client, finally, after years of just hoping it wouldn’t happen.
• Competition from above as holding companies scramble for work and from below as well-connected freelancers are Fractional Everythings.
• Taking the EIDL loan and letting it paper over flaws that should have been solved in more sustainable ways.

So that’s where we are, regardless of why you might be here. And if there’s a new fear gripping your gut, let me suggest a few ways to think about it.

First, A Rumination

A few years back, someone gifted me a two-week study course at Harvard. My whole way was paid, so why not. We stayed in dorms on campus, ate in the cafeteria, did all our research in small groups, and then made presentations to the graduate faculty, who then gave us feedback on our logic and presentation skills.

Every day we broke for lunch and would sit informally with the grad school profs and get to know each other. I had no context for what it would be like to rub shoulders with the Harvard elite, and I remember being so impressed. Before I got there.

But every day we picked apart a case study of where a company went wrong and what the Harvard profs would have done differently if they had been in charge. The goal was to learn from other people’s past mistakes and be better managers and leaders.

I decided to try something with a different professor every day at lunch, though, and I started quizzing them about what they would do in a real-life, present-day scenario. “If you were in charge of Apple, how would you handle your relationship with China?” Or, “What would you do at Boeing if you were trying to restore your reputation, while keeping shareholders, union employees, and federal regulators happy?”

No one had an answer, and that’s when I realized that it’s one thing to analyze a) someone else’s decisions b) after you saw what happened when they made those decisions.

Geez, that’s a little bit harder, right? You don’t get to examine your own case study until later. No, you’re standing right in front of some less-than-ideal options, and everyone is looking to you to make decisions. That’s where you are, and Harvard ain’t going to help. Entrepreneurship is hard, and there’s no safety net. So let’s be serious about how you might go about this if you are, indeed, facing an existential crisis.

Four Critical Keys

First, don’t lie to yourself. Think about how you normally react to tough times, and then calibrate your response. If you tend to think there’ll be no tomorrow after something bad happens, well maybe you should relax a little and realize that this too shall pass. If what you are facing is maybe as serious as it felt in March, 2020, then pay careful attention to it. But if you are always overreacting and all your friends know it, take a deep breath, pop a Delta 9 gummy and sleep on it before you make any big decisions.

Second, completely ignore any fear you might have of what other people will think if you take decisive action. It is, frankly, one of the silliest things in the world to pretend that things are great (by keeping your staff intact, e.g.) just to preserve any reputation you might have. Trust me on this: real respect is afforded to people who face reality and make hard decisions and not people faking it influencer-style.

Third, cut staff, and cut deep. This nonsense you tell yourself that you want to be prepared if things turn around is just that: nonsense. I’d much rather see you scrambling to line up contractors or even hires if things turn around than crying at your desk because you can’t meet payroll, and now you’re forced to let people go without severance.

Fourth, simultaneously prepare for success and failure. Your people can only prepare for success, but your leadership skills need to accommodate some dissonance. Here’s what I mean. Do everything you possibly can to bring about success, with all your being, but take some extra steps to limit the damage if success doesn’t materialize. More on that below.

Calculating the Timing

Maybe the most agonizing part of leadership isn’t knowing what to do, but when to do it. I think it’s completely acceptable to decide that you’ll operate on a breakeven basis for the foreseeable future. Profit should be viewed as optional, as long as it’s not frequently optional. But for a time, it can be smart.

What you don’t want to do during that time is to dig a deeper hole by borrowing money, even against a credit line. View that tool as a way to smooth out largely certain cashflow. In other words, “I know this money is coming, but it’s not here yet.” If it’s used to mask the pain that should be driving you to make difficult decisions, it’s a bad choice.

But what you should really be watching is not your profit/loss statement, but rather your balance sheet. Calculate a “Months to Live” sort of scenario and see if it’s holding steady. If it starts dropping, take big, decisive steps. Even if you’re holding steady and not climbing yet, each month you put behind you is a win.

More on Staff Reductions

This part of your plan is obviously the most painful, but it’s also the most important thing to get right. Here are a few quick suggestions:

• Be active and not passive. You need to take control and make the tough decisions to give your best people the confidence that you are in charge and that they should stick it out. If you just sit around and passively hope things will get better, the most employable people will start looking for work, and you’ll be left with the least employable of the bunch.
• Cut entire positions, normally, rather than cutting people’s hours to some part-time arrangement. Most people on the front lines don’t have that much margin in their personal lives, though some managers might be able to handle it.
• When you cut, do it in one decisive action and explain this as an amputation and not the first step in chopping a leg off one inch at a time.
• Never do it late in the day or late in the week. Do it early so that you are available to help people grieve and answer questions.
• Cut everywhere, including the management team. Keep in mind that psychologically you’ll find it hardest to cut the people with whom you have the closest relationship: in other words, the highly paid managers you spend time with. Don’t fall into the trap of cutting a lot of the lower paid people (who often bill the most) or you’ll end up with a top-heavy org.
• Resist the temptation to spare the people who do what you used to do, fearing that you’ll have to start getting your hands dirty again, only after finally finding someone who could take that over. It’s all hands on deck, including yours.
• Use severance as a good mental trick: “I can let these four people go now and give them two months of severance, or I can let them go in a month and give them one month.”

More on Limiting Damage

If your firm fails, all the clients will find new sources and all the team members will find new homes. But you’re going to have a little bit of a mess on your hands, and you want to have as little a mess as possible. Here’s how to do that:

• Distinguish between any obligations that are personally guaranteed and those that are not. The ones that are not can be left inside the corporation. Even if a creditor scores a judgment, their only (usual) hope of collection is from the corporation’s assets, and there won’t be any. But if you’ve provided a personal guarantee, they’ll be able to reach your personal assets beyond the corporation. (The exemption for your home varies from state to state.) So when you direct the limited funds you have to paying off obligations, focus on a LOC or any EIDL loan above $200k or credit cards attached to your name, etc.
• Don’t screw with taxes or unremitted retirement funds. That’s going to spell big trouble, and even a bankruptcy isn’t going to save you from that very bad choice.
• Be aware than any property transfers can be reversed. If they are to a related party (e.g., moving a building’s ownership to a family member), the court can reach back 12 months; otherwise they can reach back 3 months if they feel like you’ve inappropriately favored some unrelated party.

If Your Worst Fears Happen

You never really want to close your firm and just walk away from it. Even if you can’t wrangle some funds from a compromised transaction, it’s much kinder to not leave your team or your clients in the lurch. Maybe you can be acquihired or merged/folded into another firm. And as a last resort, “sell” your accounts for a percentage of whatever the receiving firm can bill over the next two years, on the basis of a percentage that scales down over time.

Chances are good that you are supremely talented and will land on your feet. And several years later, it’ll just be a blip on your radar. Your intentions were fantastic, you built a pretty amazing firm, and the cards just didn’t fall right. Here’s to your continued good health, and remember to be easier on yourself. All of us have these sorts of failures in our lives.