The Jim Moran Institute
for Global Entrepreneurship

Main

Services
• Consulting
• Entrepreneurial Showcase
• Mentoring Program
• Youth Initiative - Junior Achievement (JA)
• Entrepreneur Roundtables
• Tip of the Month
• Contact Us

Jim Moran Institute
• Meet Jim Moran
• The JMI Staff
• Board of Advisors
• Testimonials
• Major in Entrepreneurship

Resources


• Business Resources
• FAQs
• Related Links

Exit Strategy 2

October 8, 2006

Q- I am considering starting a business and have written a business plan. While reading about business plans, I saw numerous references to exit strategies. Do I really need an exit strategy if I intend to make this business my life? Also, I have good credit and I plan to use debt to finance all of my startup expenses as I do not have any other choice for funding. Is this going to be okay?

I am so proud of you for writing a business plan as many startups begin without one. However, I would caution you not to neglect preparing an exit strategy. A critical element of the business plan, exit strategies are imperative when getting started. Most entrepreneurs are so buoyant when starting their businesses that they do not ever consider the possibility that they may one day leave it. However, whether due to business failure, sale, merger, or even death, everybody leaves their business. Bottom line: you need to prepare a plan for each possible scenario.

Having a plan for failure by no means implies that your business will fail. Rather, like all plans, it is a roadmap that will guide you, step by step, through a difficult situation. Having a plan can minimize the effects of failure.

While death may not top the list of ways you might imagine leaving your business, you really need to have a plan for it. I have seen a business owner die leaving the widow with no option but to close the business. She sold off its assets at a very low price and got absolutely nothing for the goodwill of the business. If there had been a plan, she would have been much better off. Exit strategies also offer helpful guidance as you operate your business. For example, in the case that you plan to sell, you would want to diligently monitor profits as these will determine the market value of your business. Income statements and balance sheets would be items of utmost interest.

To answer the second part of your question, a business needs to have as much equity as possible (at least $50,000) to have a chance for success. Starting a business with equity ensures that, regardless of the financial health of the business, you will not have to make payments. On the other side of the coin, when financing using debt, you are required to make fixed interest and principle payments, neither of which take the health of your business into consideration. This arrangement increases your risk of failure.

I would much rather see you wait until you have sufficient equity in the business than borrow the money. Debt increases the risk on an activity that is just plain risky to begin with. When starting a business you want to take every opportunity you can to increase your chances of success and having debt reduces those odds significantly.

Thanks for asking some great questions.