Starting a Business? Create an Exit Strategy

“Begin with the end in mind” is one of Stephen Covey’s 7 Habits of Highly Effective People — but it’s also a great thing to do when starting a business.

And I mean that literally: figure out an exit strategy for your business before you even get it started.

Every self-employed person leaves their business someday, either by choice or by necessity. Deciding what that could look like ahead of time often helps the business run more smoothly from the get-go.

Possible exit strategies

So, what are the possible exit strategies? In a nutshell, you can:

  • Sell your business outright
  • Be acquired by/merge with another company
  • Close it up without selling
  • Have it broken up/dissolved by outsiders
  • Leave your interest to someone else upon your death

Obviously some of those options are more attractive than others, which is exactly why it’s important to plan ahead.

Think through potential negatives

It’s especially important to think through the negative possibilities so that you can avoid them. Sole proprietorships and partnerships often have special risks.

People get divorced, and their spouse ends up with half ownership. If the divorce isn’t pleasant (and how many of them are?) suddenly being saddled with a partner that doesn’t want the same thing you do makes it difficult to be successful; and it’s even worse if they actively want you to fail.

If you start out your business as a partnership, a similar thing can happen — even if you and your partner(s) still all get along. That’s because you may want to take the business in different directions, want to fill different roles, or have misunderstandings.

Spelling out and agreeing to exactly what will happen in case of unpleasant situations in writing is critical, as is having your agreement reviewed by a qualified third party.

Remember the positives too

Don’t for get to imagine what you’d actually like to see happen while you’re in the planning stages. If you’re wanting to start a business that brings in passive income, make sure you do it in a form that can be easily left to your heirs when you die.

If you’ve got dreams of being acquired by a megacorp or going public and retiring with millions, make sure you’ve got all your bases covered. Public corporations undergo a great deal of scrutiny, and that means keeping careful records. It’s also important for them to be able to be run by outsiders, which requires clearly defined processes, roles, and procedures.

An exit strategy is a plan for success

While it might seem odd to start a business by figuring out how you’re going to end it, doing so forces you to think through a variety of possible scenarios and plan for how you would handle them. You’re less likely to be caught in unexpected situations, and you’re better able to avoid the negative possibilities. So investigate your options, get the exit strategy for your business in order, and plan for success.

Thinking of starting a side business but don’t have an idea nailed down yet? Check out 101 Ways to Make Extra Money in Your Spare Time.

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14 comments

  • Exit strategy at the beginning reminds me of a prenup. For the record, I am in favor of prenups. Exit strategy can be applied to investing too. Knowing when to sell can be tricky though.

    • I can see the comparison. I imagine a prenup could help people work out potential issues too, at least by putting them on the table for discussion. But I think that has more of a stigma attached to it than creating an exit strategy for a business.

  • This approach can be used for a variety of life issues like housing, roommates and
    especially contract negotiations. I’ve done agreements on tolling (which is when one
    company does something on your behalf), and I’ve gotten feedback that my contracts
    were the best they’ve seen. Well that’s because I wrote in what happens and who’s
    responsible when there are quality issues, returns, late deliveries, etc. You assume
    it’ll be a great relationship, but write in all the what if’s.

  • Although it’s not a pleasant or optimistic thing to think about an exit strategy is definitely essential! Just like you hope you never have an emergency … but you still plan for one by
    by putting aside money in your emergency fund.

    • Yup, and the better prepared you are, the less likely it is that the negatives will happen — or have as much of an impact if they do.

  • These are great tips, and something I hadn’t really considered. Not that I’m anywhere close to self-employment, but I could be someday.

    Even on a smaller scale, I need to work out plans for what happens to my blog if something happens to me. We tend to focus on our assets, children, belongings, etc., but anything business related (even if it’s not making any money yet!) should be part of the discussion as well.

    Thanks for the food for thought!

    • That’s a good point. Even if a blog isn’t officially a business (although many of them are) there should be a plan in place for the future.

  • Not having an exit strategy is living in denial. I heartily agree the best time to lay out your exit strategy is from the outset, in your business plan.
    An exit strategy is not optional. But if you don’t choose one or plan for your optimal exit strategy, you can be forced to accept an exit strategy that is less than ideal.
    95% of all business owners do not have an exit strategy. With some advance planning, an exit strategy can increase your options, increase the value of your business and eliminate risk.

    • Oh, excellent point about exit strategies not being optional. Either you come up with ones you’d prefer, or you take what happens to come. Better to get your preferences planned out.

  • Huh…I have no exit strategy for my advertising business yet…I have no idea where blog advertising will be in 5 years, much less 20 years down the road. Guess we will find out though. :-)

  • Stephanie Blair

    I think it is always great to be prepared. We do not know what will happen but at least we can already have view of what ‘might’ happen right? I think it will give us more understanding of where we will go. Nice article Jackie!

    • Preparation is exactly it. The more possibilities you think about ahead of time, the better prepared you’ll be if any of them come to pass, and the more likely you are to steer things in the desired direction. (And I’m glad you like the article.)