I read your blog, Waterline Principle - How the Mighty Fall: And Why Some Companies Never Give In. Would you please let us know what the decision was that you faced in your business, so that we can see a real-life, perhaps smaller scale way that this principle was lived out?

The Waterline Principle is a decision making process for when great risk is at stake. It was developed by Bill Gore, founder of W.L. Gore & Associates and consists of these three questions:

 

1. What’s the upside, if events turn out well?
2. What’s the downside, if events go badly?
3. Can you live with the downside? Truly?

 

In the early summer of 2004, after six plus years working as an E-Myth Coach primarily as a subcontracting agent for ABDynamics I offered to purchase the business from the owner Kelly Schwedland.  I had already started my own coaching business [Positioning Systems] principally doing the same coaching as I was doing in my subcontracting work.  Kelly had gotten several entrepreneurial seizures and was spending little if any time coaching.  ABDynamics was essentially the website he had developed, the E-Myth Coaching Principles which I was licensed to deliver, and the administration capabilities he had systemized at his offices.  Having my own business doing similar work made me confident I could continue to do coaching at a high level.  Since the clients I was working with for ABD knew me as their coach I was also confident that all of them would stay with me if I purchased the business.  In fact most wouldn’t know there was a change at all.  

 

The upside of the purchase was the full revenue would now be mine, which would provide higher sales and a much greater profit margin.   Of course I would also be in control of spending and advertising.   I would be the boss.  As a subcontractor it could be argued that I already was my own boss, however I did have to comply with the administration policies and I could see that there were some improvements that could be made in the billing area that could streamline the process and possibly improve it for my clients.

 

The downside; I was now going to be accepting all the risks of owning this business, I would be accepting fully the administration and billing aspects, plus taking over the website and operating it, something that I had limited knowledge of.  I would need to hire someone to help in this area, and increase my knowledge.  If events went badly I could be over my head and possibly in time out of business. 

 

If events went badly could I live with the downside, truly?  I don’t recall knowing this formula at the time, and I don’t really recall having asked myself a question like this, however I know I thought about what the worst that could happen would be.  As a coach for 6 years and having started Positioning Systems which duplicated the work I was subcontracting for ABDynamics I felt that this was going to be my life work, my career.  I had wanted to own this business, and by adding ABDynamics I felt that I was suddenly more than doubling my own business and increasing my opportunity.  So the downside, if there truly was one, existed in outright failure, which if it occurred meant that I had chosen the wrong profession to become an expert in. I would be taking a substantial loan out to pay for the company, and the concern was being unable to pay for it.

 

Kelly was very agreeable to the price I recommend for purchase.  As things turned out we were able to pay the loan off much more quickly than we anticipated.   The downside of this transaction came when less than a year later the E-Myth decided to pull all of their coaching licenses from the independent coaches.  This was one aspect I had not considered in my decision.  Fortunately our licenses provided a 3 year window to continue to find other coaching alternatives to utilize.  

Looking back on that decision I wouldn’t change it.  Disappointing as it was to lose the E-Myth license, the ten years of coaching experience I gained from their methods and tutelage cannot be taken from me and I use the concepts and practices to help my clients every week to help them to continue to systemize their businesses. 

 

The example I give of the Waterline Principle is certainly not as big a risk as the Challenger decision, or the decisions Motorola or TI faced that Jim Collins discusses in the book.

 

However it does beg the question on whether your business has a system or method in place to help your people make decisions.  How do the people in your business make decisions?  If you don’t have a system in place do you have a Core Values that you can refer to help you in decision making?  Every decision does not involve a high degree of risk.  A business that is concerned about its future, that wants its staff and leaders to act in accordance with its culture and pass it’s DNA on to the next generation should consider developing a decision making process that will ensure its development will continue on the path it’s chosen.