It’s time to face a fact (or at least a fact that investors require you to acknowledge in a business plan): Despite your best efforts, your business may not succeed.

No one starting a business wants to think about the potential for what they might regard as failure. The important thing to realize is that going out of business is not a sign of failure if you have acknowledge the potential and planned for it so that it can happen gracefully. An exit strategy is not only required in a proper business plan, it is also a sign that you are a business professional and realize that even the best ideas do not always succeed.

Right now, take out a piece of paper and write down all the businesses and products that you know are no longer around. Think about that favorite candy you had as a child that can’t be bought any more: Did the company go out of business or just stop offering the product? What happened to that restaurant you used to go to all the time a few years ago? Take some time to research current business closures and recently filed bankruptcies in your area of business. Find out what went wrong for these businesses. Where does the company place the blame? If it’s an article, does the author give some idea of the reason for the business failure?

You will perhaps discover in your investigations that it is often something far from the business owners’ control that caused their businesses to fail. These days the chief reason is often just the generic catchall of “The Economy.” There is also the second favorite of “Changes in Consumer Behavior.” Are these excuses to explain bad business practices and mismanagement? In some cases the answer is, of course, a resounding “yes.” But, in most cases, the businesses really did have to close because of a gradual or sudden change in consumer behavior or income.

Perhaps it can be best explained that while you have almost infinite control over your potential for success, you have somewhat limited control over your potential for failure. The only way you can control failure is by trying to succeed and being ready to successfully end operations before your company fails. A good exit strategy makes going out of business as positive of an event as such a scenario can possibly be. How did the companies you looked into enact their exit strategies? Was their dignity and grace (and perhaps even profit) in their closure?

Now that you are done looking into the worst worse-case scenarios of other companies, it’s time to look into your crystal ball for your business and figure out what you would do if your business needs to shut down. What markers will you use to indicate that you have reached a point of no return? Will it be the amount of money you are taking in or the amount of money you are putting out that will herald the end of days? Will you enact your exit strategy at the point when there are simply no funds left to function (run the company into the ground) or will you time it so that you can pay off your debts and end up breaking even? Perhaps you will even time it so that you can make a small profit at the end to fund another venture or support you for a time while you look for work. It’s up to you to decide under what circumstances you will close operations. Write down your ideas of the why’s and when’s of an exit strategy.

When you have your reasons for an exit strategy clearly defined, it’s time to make the plan for how’s of closing down your company. Make note of what you will do with any remaining assets. Will you sell of your equipment? If so, who will you sell it to and how much will you get? What about remaining inventory? What about money you are owed? What about your debts? How will you pay off your debts and end your liabilities?

That last point is vital: You need to pay off your debts. Depending on the structure of your business, in the majority of cases, the debts of your business will become your personal debts when the business ceases to operate. Even if your business structure provides some protection for your personal assets, it will not prevent your debtors from filing legal actions for collection. They may or may not win these law suits, but it will cost you money and time to defend yourself against them. A proper and professional exit strategy will resolve all debts and eliminate the liability of all parties involved in the ownership of the business. Your exit strategy should leave a clean slate behind and leave you able to claim your suppliers and previous debtors among your good references. 

To write a good exit strategy, you will need to balance the markers of when and why to close against the need to pay off debts. It should be noted that you may not realistically be able to pay off long term debts such as business loans and mortgages through liquidation. Acknowledge that these loans will become your personal debts (if they are not already) when the business ends and address how you would intend to pay them even if there is no longer an operating business.

On an off-topic note, you should also realize the potential of personal liability inherent in long term debts before using such funding for your startup business. I’ll leave that to a future post.

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