Every ESOP Has a Worst Day Coming. Does Yours Have a Playbook?

The CEO's voice was calm. But we could hear it underneath. Dread.

Seventy-plus years in business. Generations of employee owners. A company that had weathered recessions, supply chain crises, and market shifts. And now, with 90-day notice, their largest customer was gone. As a result, revenue was plunging. EBITDA was collapsing. Layoffs hit 30% of the workforce. 30% of people who own a piece of the company were asked to leave. And a seller’s note hanged around the company's neck like a noose.

How does a company full of optimism and a glossy growth strategy lose its footing in 90 days?

It doesn't happen overnight. It happens by asking the wrong question over the years.

Many ESOP leadership teams spend enormous energy on growth. Where to expand. Which markets to enter. How to increase stock price. And they should. Growth is exciting. After all, we get paid to grow the business, not to shrink it.

But here's what we rarely see: an honest conversation about what happens when the worst day arrives. An honest conversation about risks. Existential risks.

For example, when did you last model what losing your largest customer would do to your business? Does your balance sheet have the strength to absorb that blow? Do you have a playbook for the day after?

Most companies we work with don't. And they're reluctant to build one. Somehow, they believe that modeling the worst case will summon it.

This is not a strategy. This is hope, or even worse, a gamble. “Hope for the best and plan for the worst” is a cliché but a wise one.

A historical analogy may be worthwhile. An advisor and uncle to Xerxes, a King of Persia in 480 B.C.E., is said to have told the king, "The prudent leader dreads and reflects on everything that can happen to him but is bold when he is in the thick of the action." 

Too often, we see leaders focusing on bold actions but not on dreading the worst.

So why do we refuse to plan for the worst? We believe there are two reasons. The first reason is that we don't have a disciplined risk framework to assess the worst scenarios. The second reason is that we don't want to think about bad outcomes because it sucks the air out of our optimism. And we have been told that leaders must be optimistic. 

The best leaders aren't just focused on playing offense. They are obsessive about protecting their “flanks.” They know that focusing only on your bold victories without securing your position is not boldness. It's recklessness. For example, most companies we are working with have customer concentration issues. For some, the largest customer represents 80% of sales. For others, 10%. Regardless of where you are on this spectrum, losing such a customer can be the worst day for a company.

So tomorrow morning, do this on the back of an envelope:

Take your largest customer or two largest customers. Reduce their revenue to zero. Model your EBITDA impact. Model your debt obligations. Model your cash runway.

Can your company survive it?

If yes, congratulations! Now go plan for growth with confidence, knowing your flanks are secure.

If not, you have work to do. Start today. Create a playbook for the day after.

The company we spoke with was fortunate. The crisis forced decisions that should have been made years earlier. They will survive. They may even emerge stronger because crisis has a way of burning away everything that isn't essential and revealing what actually matters.

But survival shouldn't require a crisis.

The best leaders we know don't just plan for the world as they'd like it to be. They plan for a balance sheet that can withstand a scenario that is 20% worse than their worst case scenario.

Does your strategy protect your flanks or just extend your victories?