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Why You Need a Business Exit Strategy

have a business exit strategy so you know when it's time to close and start over

So, you’re just starting your business, and you’re in the planning stages right now. You’ve looked at your idea critically. You know roughly how much it’ll cost to bring your vision to reality. You’ve even worked out a preliminary pricing model. So far, everything looks great. Why do you need to be a Debbie Downer and think about a business exit strategy?

The fact is, many businesses fail in their first year, and about half won’t make it through their fifth year. What makes the difference between success and failure is a little bit of luck mixed with a whole lot of persistence.

But persistence is a double-edged sword. Sometimes, persistence blinds you and pushes you past the point where your profit can ever make up for your time and effort. This is why, before you become emotionally attached to this new business, you should have an idea of when you’ll stop—stop sinking in more money and stop sinking in more time.

Let’s take a look at some of the common stopping points and business exit strategies. They’ll help you figure out when you should call it quits.

Building a Business So You Can Sell It Is a Legitimate Business Exit Strategy

Exiting a business doesn’t necessarily mean closing down a business. Sometimes, exiting a business means building it to some point so you can sell it. Plenty of folks do this. They’re called serial entrepreneurs.

Serial entrepreneurs have a time frame and/or a business volume (in dollars or in number of customers) in mind. Once they hit that number, they look for a buyer. Having this clear goal helps them make business decisions, since they know what issues to prioritize over others.

Sometimes, this type of business exit strategy sacrifices long-range planning for the short-term goal of business volume or customer base. So, if you’re looking to buy such a business, review the operations carefully before you sign the purchase agreement.

If You Have Partners or Investors, Decide How to Divide the Business If One or More Wish to Leave

While plenty of businesses are owned by just one person, many others have partners or investors. Some partners or investors only provide money, but others will be working with you to build the business.

People tend to work with those they like or at least respect. So, during the initial stage of building a business, things tend to go smoothly.

But, often, the relationship sours. One or more owners would exit, and the business would continue with the others. Sometimes, the business just closes. The best time to work out a fair business exit strategy for each owner is while the relationship is still good.

Talk through and write down the fairest way to break up your business relationship. Consider the following:

  • Should you sell the business?
  • Should one person buy the other out?
  • How should you decide how much to pay?

Then, go to a lawyer who can help you draft this out in clear wording. (This is actually part of the process when a lawyer helps you incorporate, form an LLC, or set up a partnership.) Once everything is done and signed, you won’t have to think about this again hopefully for a long time or maybe never.

Know When to Activate Your Business Exit Strategy Before You Lose Your Life Savings

As mentioned earlier, persistence is a double-edged sword. It is the key to any business’s success, but it is also often a business’s downfall. Many businesses go into bankruptcy because the owner(s) become too emotionally attached to the business. They continue to put money into an endeavor that is past the point of being salvageable.

Be careful in thinking that, if you incorporate, the business format will insulate you from bad credit history. Many contracts, especially those you sign when your company is still new, will require a co-signer. Usually, that is you, as an individual. This means that if your company declares bankruptcy, you, personally, are still on the hook for the debt.

So, before you take that second mortgage on your house and max out five credit cards, figure out a point where you’ll stop putting money into the business. After that point, the business will either make a profit and stand, or it will fail. You can always start again.

If You’re Working Hard but Making Little Profit, Then Exiting Might Be the Best Option

Lastly, one of the most difficult decisions a business person can make is to wind down a business even though it’s making money. But, sometimes, this is the right thing to do.

Small business owners tend to have to be a Jack-of-all-corporate-trades. They must be their own human resources, accounting, production, sales, etc. departments. They often work 12+ hour days, seven days a week. And they must pay other people before they can pay themselves.

This is normal at the start of a business. But, if you’ve owned your business for a year or two and you’re still working very hard but not making much, then it might be time to look into a business exit strategy.

There is no right answer here. There’s always hope that your big break will come tomorrow, and you’ll get that big order or deep-pocket client. You’ll have to be honest with yourself on your chances.

Be sure to examine whether there are inefficiencies in your business that you can fix (and raise your profit margin this way). Sometimes, raising your price/rates at the expense of losing a few customers or clients can push you into healthy profitability.

Probably the best way to make this decision is to calendar a review at the end of your 1st, 2nd, and 3rd years of business. Then review every few years after that. While it’s typical of businesses to suddenly go from very profitable to only a little profitable or vice versa, eventually, you’ll be able to see a trend. If that trend shows you can never make a healthy profit, then maybe the right thing is to use that business exit strategy to wind down the business.

Winding Down a Business Is an Emotional Decision, so Knowing When You’ll Call It Quits When You’re Just Planning Your Business Will Save Heartaches Later

Running a business takes not only money, but time and effort as well. While the former is easy to valuate, the latter two are intangible and may even be invaluable.

This is why deciding to wind down a business is such a tough decision. You’ve poured your heart and soul into it. But sometimes, it is the correct decision.

So, even before you start your business, have an idea of a point beyond which you’ll stop investing any more of your time and energy. It’s easier to figure out your business exit strategy at the start than when you’re in the middle of running your business/losing a lot of money but hoping things will soon turn around.

You can always make adjustments as you go. But knowing from the start when it’s time to quit is the best thing you can do for yourself.

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

Questions? Comments?