A common practice in writing business plans is to offer three scenarios: most-likely, best case and worst case.
When I see worst cases presented in most business plans, they are almost always not the worst case scenario. They are most often a less optimistic variation of what the entrepreneur thinks will actually happen. The real worst case should be this: if things don’t go as planned and the deal fails, what is the outcome for investors and lenders?
Entrepreneurs seem to operate under the assumption that if they don’t plan for failure, it can’t happen. If they don’t ever address the real worst case, investors and lenders won’t think about it.
I get push back on thinking and planning for worst case from my students. “Don’t you think my idea is any good?” That is not the issue here. Even good ideas can fail, as most opportunities come from a dynamic, changing environment.
All of this came to mind after a conversation yesterday with my father. We were talking about a potential deal, and he made the statement that he wants “protection” in a deal. That was an interesting word to me. After all, we aren’t a bank that can get a personal guarantee on debt. Any investment would be at risk.
But, he meant something else. He simply looks at every deal and imagines what it will look like if it goes bad. What can he hope to take away from it? He thinks this way because his generation saw the ultimate worst case — they lived through the depression. It is not that he is risk averse as a result — to the contrary. Rather, he is always soberly realistic that deals go bad, and we should understand where that will leave everyone involved. That is a perspective that we seem to be losing in our society.
Failure is real, and it can happen to even the best among us. So plan for it. Just in case it does happen, and hopefully the odds of that are slim if you have done your homework, you will be ready to move on to the next opportunity. You will have created a deal in which you have actually planned the worst case and have created a business where the worst case is not the end of the world for you — just for that deal.
And just so you don’t go in the wrong direction with this, your outcome in the worst case should not be to declare bankruptcy for the deal. That is a reputational scar you do not want in your background as an entrepreneur if you can avoid it. To plan for bankruptcy is in my opinion, unethical. Once in a while it unavoidable, but that should not be the predetermined plan.
Don’t be in denial about the worst case. Understand it. Plan for it. Make it an outcome you can move on from.
Dr Jeff Cornwall
Co-founder of The Entrepreneurial Mind, serial entrepreneur and professor of entrepreneurship.
Good post. So if bankruptcy is not in the plan (I agree), what’s are examples of a “good” worst-case scenario plan? Investors sell remaining assets to customer/competitor/next sucker? The entrepreneur and team can be “re-purposed” to the investors other ventures?
Also, do you think this sort of sobering “worst case” scenario makes an investment more attractive to an investor who may be accustomed to seeing the optimistic worst case? I understand it’s far easier for the investor to be objective and seek “protection” but don’t they also share the optimism of the venture. Doesn’t the entrepreneur risk throwing cold water on the deal before it has a chance to succeed? I agree it’s the right thing to do but, man, that’s hard for an entreprenuer
Good questions.
Here is a good worst-case: a new dog kennel. They set up two entities — one company owns the building, one owns the operating entity that provides the services. They set it up this way for liability protection. If something drives the kennel out of business, you want to at least make sure you have building that will have residual value that can pay off debts on the building and allow the entrepreneurs to have a clean start on the next deal.
You’d actually be surprised that many investors and bankers will develop this type of worst case when they run their own version of your numbers. You don’t put it in your business plan, but have it in your hip pocket so when they ask about the worst-case, you have a thoughtful response. A well thought out “back door” is not cold water to investors or bankers, it is a breath of fresh air.