Welcome to the bloggy home of Noah Brier. I'm the co-founder of Percolate and general internet tinkerer. This site is about media, culture, technology, and randomness. It's been around since 2004 (I'm pretty sure). Feel free to get in touch. Get in touch.

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Business Expiration Dates

I’ve had a few conversations recently about the idea of businesses with expiration dates and I thought maybe it was worth getting some thoughts down. Essentially I’ve been playing with the thought that instead of puttering out 8 years down the line there might be an opportunity for a company to choose its end date and put itself to rest peacefully.

Nobody wins forever. It just doesn’t happen. The big company who have been successful for a century can be counted on your hands. Of course there are Harvard Business Review case studies written about them and they’ve been massively successful, but they are anomalies. A company like GE really shouldn’t exist according to most of what we know about the world. (They are a client of mine, so take whatever I say about them with a grain of salt.) They’re massive, in a ton of different businesses and have existed for over 100 years. This isn’t normal.

What we see in reality are millions of corpses of businesses and ideas that have made their impact (or not) and then petered out into oblivion without leaving much more than a memory. Some of them get bought and swallowed by a bigger company, others have their ideas copied and commodotized and many just don’t have the business or financial chops to make it all work for more than a few years.

So what if instead of worrying about all that you just decided at the beginning you were going to end it all six years in? I’m not sure how you’d decide the timeframe, but let’s put that aside for a second and imagine what would happen if you did. One hope is that it would solve the short-term over long-term problem. Part of the long-term issue is that you have no idea how far into the future “long-term” really is. Company management doesn’t know how long the company will last, so they optimize for the now (they also don’t know how long their jobs will last, but I’ll get to that in a minute). It may be overly hopeful, but as long as one choose a reasonable time-frame (5-10 years) I wonder if you couldn’t lift the decision-making out of the immediate.

The problem here, of course, is that the employees will likely not plan on sticking around for all that time. This, I think, is actually the biggest problem in most of business at the moment. It’s certainly the shortcoming of my business expiration idea, because if employees aren’t in it for the full haul we’ll have the same sort of misaligned incentives and general screwups (at least at the beginning). So on this one, what if we started making jobs with expiration dates? Most of the people I know go into jobs at the moment with little plans of making it beyond three years (as of 2008 the average job tenure for Americans between 25 and 34 years of age was 2.7 years). Whether this is a good thing or a bad thing isn’t what I’m really interested in at the moment, instead I wonder what would happen if you just capped it. Especially in the advertising industry, where turnover seems higher than most, what if you just signed people up for 2.5 years in the first place. Companies would know what to expect out of the employees and could plan their transition far better and employees wouldn’t have to stew as they got bored. Obviously you’d have to figure out a financial incentive system that worked with this sort of arrangement so that the person didn’t check out at year two, but that could be figured out I suspect.

Anyhow, as usual, this is just me thinking out loud. Happy to hear any thoughts. I don’t know if either of these are actually good ideas, but they at least seem theoretically intriguing.

February 27, 2010

Comments

  • Michal Migurski says:

    I think this might a partial feature of LLCs, at least in California. At a certain point of growth it makes sense to change structure from LLC to C-Corp which I believe is immortal.

    “The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC’s must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.” http://www.residual-rewards.com/california-llc.html

    Did you ever see The Corporation? It explores a lot of these same ideas, specifically the way they interact with the legal concept of personhood for corporate entities. Such deeply weird, weird stuff.

  • Adam says:

    In terms of a business, a expiry would severely limit your ability to raise capital for anything other than a guaranteed full return (plus a bit extra above inflation) before the expiry date. And if you could guarantee that in six years, well, why would you EVER want to limit the term of such a business?!

    Also, since under any sensible business laws such an expiry couldn’t be kept secret – particularly not from the ‘authorities’ – the company’s assets (and any paper stocks representing them) would face continual revisions downwards in expectation of the sale at expiry. This would put competitors at a great advantage assuming they hadn’t adopted a similar – and binding – limitation coinciding exactly with yours.

    And even if made an open policy, investors/owners would most likely insist on a clause that extends the expiry for an indefinite period to fight off asset predations – particularly if they had creditors to pay – somewhat defeating the whole point.

    Thinking of creditors, there’s the problem of short-term/high-cost relationships with suppliers and limits on the availability of vendor financing.

    But in the case of employees…

    ‘The Job – Time for the lies to be exposed & for it to die’
    http://smartpei.typepad.com/robert_patersons_weblog/2010/02/the-job—time-for-the-lies-to-be-exposed-for-it-to-die.html

    …it needs thinking about.

    But one observation. If many employees had agreed to similar fixed-term employments – and had shared the fact – what’s to stop them ‘organising’ into little unions and using the limits to extract advantageous ‘terms’?

    And if organising, are they not in effect working as their own ‘company’, being bound to each other (for a time) for mutual advantage? Then, imagining this a widespread practice, a simple union-busting technique would be for afflicted employers to simply offer open-ended contracts and resolve ‘purpose drift’ issues with iterative work plans and goal-setting.

    In the end the market does a reasonable good job of deciding what has outlived its usefulness, unless, of course, someone has bribed a politician for use of the government’s guns.

  • David Gillespie says:

    Noah, I really like this idea, and I think it has legs. If you take advertising as the example, it is probably fairly easy to make the argument that it’s worth closing up shop every 5 years and starting again.

    If you treat it more like a micro venture fund as opposed to a business for longevity, you can roll with the fact that media is changing so rapidly, and every few years re-deploy your offering, either with a revised team with new skills or the same key few people each time and build around them.

    After a cycle or two, clients would either come to appreciate the regular refocus and specialisation, or you’d quickly discover it just wasn’t sustainable. Of course there are all kinds of questions around how you would scale each execution fast enough, but the idea at the core is, I think, an exciting one.

  • Andy says:

    It’s an interesting thought-exercise.

    When I was a kid I read a short story based in an alternative reality where workers could choose the date of their death to affect their income. I.e. You could get an awesome pension if you agreed to be terminated earlier. Time vs money taken to the extreme.

    Like the story, I guess one of the biggest problems would be getting to the point of expiration and changing your mind! :)

  • Bill Petti says:

    Noah: It’s definitely an interesting idea. My initial thoughts are that it wouldn’t work particularly well (whether we are talking about business or employee expiration dates).

    Here is my reasoning.

  • Noah Brier says:

    @Mike: Never saw it. Have heard good things. Will check it out.

    @Adam: All very good points. I absolutely love the fact I can throw a half-baked idea out there and get this sort of thinking back.

    @Bill: Responded over at your site. Here’s what I wrote for everyone else’s benefit: This is awesome. I love that I can throw a half-baked thought out there and get this sort of response. What about the possible advantages of business expiration dates? This could theoretically allow investors to take more cash out of the business in the short-term if that’s something they’re interested in. Also, with the product cycle being what it is, if this business was focused on opening up a new market, five years should be plenty of time to push competitors in. Especially if you look at an industry like consumer electronics, 6 months can make or break a company. So what if they came in with their one good idea, made it happen and then hopped out?

  • Pedro Daltro says:

    I love this idea because it kills the long-term, something we think we understand but we have no idea how to deal with.

    But what about customers? How they deal with a brand that sonn will be dead?

  • John says:

    Hi Noah:

    I agree with Adam’s point about investors requiring a guaranteed return, and your point about the hazards of employee turn-over. That’s why the best example of a business with an expiration date might be a “special purpose entity” — of the kind created all the time in the bond business. An SPE is a corporation with a board, but no employees, whose sole role in the world is to take in a flow of revenue, and pay out interest to investors. Mortgage-backed securities, much maligned recently, are the best-known application of this method.

    Pop-up stores are another example. The ones that get most attention are bankrolled by big companies that want to make a splash in some locality for some time period. But I bet most pop-up stores are the products of temporary marriages of convenience, say, a group of craftsmen who decide to band together over the Holiday shopping season, and sell their wares in Union Square.

    If you’re willing to abstract the definition of business for moment, a third example is new buildings that are designed with medium-term obsolesce in mind. Think about examples of architecture where on-going maintenance is an afterthought. The Allianz Arena in Munich — by Herzog & de Meuron — comes to mind.

    John

  • Bill Petti says:

    A few questions about your questons.

    1) How widely publicized is the expiration dates? Is it just amongst management and investors? Firm-wide? Public?

    The degree to which this information is public will create all sorts of interesting strategic dynamics.

    2) Advantages for who? Investors? Management? Employees? Macro economy?

    Again, depending on who you are talking about the virtue of expiration dates will likely vary.

    In terms of investors, theoretically they could pull more cash out in the short term, but I wonder if it would inhibit investment to begin with. Private Equity, for example, may make a 5-year bet on a business, creating an expiration date for their investment but not the business. But the idea is that the business will live on and someone else (another company, investor, or the market) will want to take ownership and reap a return on their investment. If the business is set to expire in 5 years what kind of a return can one expect?

    And why would a firm want simply to open up a market only to leave and let others benefit from their hard work? Maybe if the firm was created by a parent company looking to ‘prepare the ground’, if you will, for later entry? Not sure.

  • Seni Thomas says:

    Well with the average length of a VC fund being 10 years that is the high of a company before “death”. With today’s exit markets companies are built to be consumed or in essence killed off in that period. In addition, through the consumption of smaller companies the behemoths can inject themselves with life based on the Innovator’s Dilemma concept. Integration is a big IF here, but buying innovation is a way of pumping adrenaline into the heart of the big boys.

  • Floyd Hayes says:

    Good piece Noah.

    I’d like to take it a bit further. I wonder what would happen in the world if people had an expiration date. Sort of like Logan’s Run I suppose.

    I know we do have a expiration date with death (well, this side of The Singularity anyway) but I think many people kind of don’t believe they’re going to die. If they did, why do we waste so much time sweating the silly stuff?

    I think people would be happier with an exact date and time. No putting off dreams, empty wishes, asking that girl out or visiting Japan.

  • Steve Poppe says:

    Cool idea. Just as a pop-up retail store has a limited run, a pop-up business might be a very effective short term enterprise. And it might be in great demand should the collaborating partners be interesting enough. Jack White has blazed some territory here musically, I think. I like it.

  • Tom Kasperski says:

    In War College they teach ‘even the best battle plan changes as soon as the first shot is fired.’ e.g. Apple is no longer just a computer company.

    Setting an expiration date seems limiting and unnecessary when you have an opportunity to set any goals you want for the next 5-10 years. Financial incentives to meet those long term goals seems key. The management of publicly traded companies are rewarded for short term (quarterly) performance, not meeting longer term objectives – and there lies the problem.

  • Stephen Walker/Headmint says:

    Noah
    Interesting post. Ad agencies have toyed with this.
    Howell, Henry, Chaldecott, Lury set up as a 10-year idea. I think Springer and Jacoby in Germany also did something similar. I think Red initiative should have done this.. Feels very Tom Peters too.
    Difficult to do as an entrepreneur though. Raises interesting questions about one’s true motivations and ability to hire. I think “Be Do” and “If I ran the world” start-ups are interesting in this context.

  • John says:

    If I was to start a company with a short life expectancy, I would approach my employees with a profit share incentive up front. The harder you work, the larger the turnover, the bigger the bonus. It’s a large carrot to dangle if teh person is motivated enough.

  • Farrah Bostic says:

    coming late to this party… i’m thinking about people who are ‘serial entrepreneurs’ – they help to conceive of a business idea, they start it, they grow it up to a certain size, and then they move on. a good friend of mine fits this mold – about every 4-5 years he begins a new business. almost all of the old businesses still exist, and he often retains a stake in them. but he is on to the next idea and the next. he does this, i believe, for two reasons – one is that he is, like me, ADD and has lots of interests that need exploration and sating, and the other is he knows when he has reached the level of his own ‘incompetence’. he knows when what the 3D graphic engine company needs is a CEO who gets the broader software market. he knows when what the DVD menu & interstitial design company needs is a CEO who gets distribution channels. and so on. he lets these companies evolve into their next life without his day-to-day input, and he moves on to the next thing that would benefit from the creative leaps and vision he brings to the table. everybody’s happy.

    the problem – that may be unsolvable – is that markets, investors, VCs, whomever, all erroneously believe that ‘good’ companies can and should live forever. and that the revenue curve always trends up. they are wrong of course, but the whole system is contingent on these beliefs.

    investors want the visionary employees to stay on to keep the perceived value of the company high – despite that it has now evolved from being a small group dependent on risk-taking/new ideas, to a larger process in need of efficient management and incremental improvement.

    i’ve worked for several companies that were acquired by holding companies. during the initial acquisition period, all the players on the board are frozen – they have to stay. they are also expected to create often unrealistic levels of year-on-year growth (the kind that is possible to do in the first 5 years, but gets much harder in the 2nd 5). by the time a, say, 3 year buyout is completed, the company is much larger than it was at the time of the initial acquisition, and is fighting harder for incremental dollars. from this point on, it’s about acquisitions, or about highly stressful mismatches between capacity to execute and size of customer order (suddenly winning a huge account, but having to delay staffing up or expanding infrastructure because of capital issues or simply the desire to book more profit).

    the ‘culture’ erodes and your best employees tend to seek other opportunities, either because they want an improvement in quality of life, or because they want to go back to the time when their ideas mattered to the organization, or because they want to ‘level up’ to the next thing and have more autonomy/authority for themselves.

    the other thing i am thinking about is the fallacy of big organization efficiencies. the company i work for was acquired by a much larger multinational. the private equity company that helped the sale is very happy; the erstwhile ceo is very happy. investors in the new parent are very happy. but because of the layers of organizational strata, the processes themselves, and the bias towards using these and no others, our costs are already beginning to rise. these costs are expressed in actual dollars (using more expensive vendors, with less expertise in my area, for instance – so i pay more and get less), and in time (tripling decision-making time as we navigate the organization and secure new layers of approval). this then raises the prices i am expected to charge clients, as well as creating incentives to charge them more for my time, because i will spend more time (almost all of it on internal structures) on their project or needs, and someone has to compensate the company for the time i spend.

    it probably won’t hurt the larger company’s bottom line; but now it creates an opportunity in the market place for a smaller, scrappier, more improvisational, leaner, faster company to come take the place that has now been vacated by the acquisition. this is not a bad thing – new companies with definite market opportunities should have a turn at bat. and the cycle begins anew.

    ok – so i’m thinking out loud here, too, obviously – but what about this: alignments exist between business functions and market needs/opportunities. but because of structural demands (and traditions), this alignment is pulsing instead of constant. the pulses last, say 6-10 years. the business function evolves or outgrows the market opportunity – pressures exist to identify other market opportunities or to level up to another market opportunity. meanwhile some new entity comes in to soak up the first market need, though probably – hopefully! – with some new, differentiating twist.

    so why not think of it not as ‘expiration’ dates but ‘reincarnation’ dates. this company as conceived has a 6-10 year useful life before it must become something else. either it becomes larger, or it shifts focus, or it completely reinvents, or it sheds its skin and begins again, or yes, maybe it really just does die. new people will be required for the reincarnation (or none at all if it dies). couldn’t you set up market incentives around expectations for this reincarnation – rather than diminishing value as you approach the end date, increasing value dependent on execution of a successful reincarnation? does that make any sense at all?

  • reeegan says:

    reminds me of this:

    http://www.amazon.com/Creative-Destruction-Underperform-Market-Successfully/dp/0385501331

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