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Of exit strategies and small businesses

Of exit strategies and small businesses

The Money Blog Network has invited other bloggers to join in on this month’s group writing project: Your best advice for new entrepreneurs.

If you’re looking for new business ideas check out this article: Profitable Great Busines Ideas!

I’ve started quite a few businesses over the years, most of which were profitable to one extent or another. My experience is with the micro business — a sole proprietorship or a partnership with no employees, so I’ll write from that perspective.

The absolute best advice I could give to a new entrepreneur is to have an exit strategy in place. In other words, before you even START your business, figure out how you’re going to STOP it. That might seem counter intuitive, but it will force you to really think the nitty-gritty details of the business through. Exit strategies are not only for closing your business, but for exiting what has become a bad situation.

What’s involved in coming up with an exit strategy? It’s mainly a matter of thinking up worst case scenarios and making preparations to protect both your business and your current lifestyle accordingly. Here are some of the things to think about:

    • What could happen if you’re suddenly incapacitated? (commonly known as the bus test)


    • What could happen in case of a hostile take over? (such as if you’re married and get divorced and your ex takes half the business — even though they were not involved with running it — or if a partner sells their share or dies and leaves it to someone else)


    • What could happen if a partner doesn’t pull their weight or wants to go in a completely different direction, or if you just decide that the business isn’t for you?


    • What could happen if you’re sued?


    • What could happen if you don’t make any money at all for 3 times as long as you had estimated?


  • What could happen if you not only don’t break even, but you lose money steadily for a long period?

All of those things could result in the closure of your business (or worse), but preparing in advance can help mitigate the risks and free you to focus on the actual running of the business.

Here are a few examples and potential solutions to those scenarios:
In the case of the bus test, it’s important to put business procedures into place that anyone can follow. If you were to be hit by the proverbial bus, a partner, friend, or relative could step in and run your business for you until you had recovered. (Or until they were able to sell the business.) This means that not only do you have to think things through and set up logical procedures, you have to document those procedures AND let said partner, friend, or relative know about them. Think this through right down to the smallest of details, such as your voice mail password. (My mom did a great job of preparing her business for such a situation, except for one tiny detail. When she did in fact suddenly become incapacitated, her business continued to run smoothly until it could be shut down — with the exception of us not being able to access her voice mail to get previous messages.)

Hostile takeovers in the form of a disgruntled or uncooperative partner (whether you’re married to them or not) can most often be prevented or at least minimized if there is a detailed WRITTEN, WITNESSED, and NOTARIZED partnership agreement in place that has been thoroughly reviewed by a legal expert. The same thing applies to a partner who suddenly has a different vision or doesn’t pull their weight. The agreement needs to spell out exactly how one or both partners can pull out of the business; what they need to do, what they will get, and what happens if they are incapacitated or die. Legal advice is important for other reasons too.

Which bring us to insurance. Liability, errors & omissions, and key partner insurance are all good things to have. Get several quotes on these, and understand what is and isn’t covered thoroughly. Protect your assets and your lifestyle.

Also be wary of putting up personal assets as collateral. If you’re just starting a small business and you try to get a business loan any bank you apply to is almost certainly going to ask you to personally guarantee the loan. They know that most small businesses fail, and they want to be sure they can get their money. If yours fails and you have this type of a loan, they can take your assets. Think about how your family would feel if you lost their house. Sure, the numbers always look good when you’re thinking of starting a small business. If they didn’t, you wouldn’t start it. This is part of why I always go the bootstrap route instead.

The reality is that many entrepreneurs tend to be very optimistic people. You probably won’t believe it after reading this post, but I’m one of them. Which is why it’s important to really force yourself to focus on the potential negatives. They can come and bite you if you don’t. And if you do focus on them temporarily, you’ve increased your chances for actual success by a great deal.

View Comments (2)
  • Most entrepreneurs need to borrow money at some point. When you’re in the market for small business financing, determining what kind of loan you can qualify for is the first step. Thanks for the info!

  • Absolutely, one should also let new entrepreneurs that some starts up cost are actually deductible although they must be amortized over a s et number of years.

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