Most small business owners don’t have an exit strategy for their businesses. This is a huge mistake, and it’s essential to make sure you have one in place before anything happens. On July 20, 2017, our partner Chester Bennington passed away, and his estate technically became our new business “partner.” This was an unforeseen and unintended consequence, which meant people we didn’t know had to be consulted if we wanted to make changes at that location. When we set up our partnership agreement in 2004, it lacked an exit strategy for the event of a business partner’s death. Since his passing, all of our contracts have exit strategies and contingency plans to protect ourselves and our partners.
Whether it be dissolving a partnership or planning for the case of death, there needs to be something guiding your business through it. Here are four things you need to consider when creating an exit strategy plan for your company:
A Good Exit Starts with a Strong Plan
People tend to think of safety measures as something only necessary in extreme circumstances. But there are contingency plans built into almost everything we do, and everywhere we go, from hotel exit strategies or school fire drills to stadium emergency evacuation routes. Not many people want to think about the future, but creating an exit strategy for your life or business is essential. What happens if something unexpected and unfortunate were to happen? It’s no different for your business, which is why you must have an exit strategy.
For an exit strategy to be possible, you have must understand yourself and define your goals.
- What level of risk am I ok with while I’m in the business?
- How much money do I need to survive or thrive each year?
- What type of lifestyle am I looking for after I leave the company?
Lack of clarity in these areas leads to undefined goals, such as “I want to save up enough money to retire.” But how long will that take? And what do you need to do to get there?
In your plans, you need to acknowledge what assets are essential to dissolving or selling a business. Inventory and intellectual property rights are just a few items to consider when creating your exit plans. In addition, determining who owns what when times are good can save hassles and legal fees down the line.
Strong Partnership, Strong Strategy
When my wife, Thora, began working in the business, it took some time for me to become used to the idea of her as a partner. I had worked hard to start Club Tattoo, and it wasn’t easy for me to let go of my sole-owner attitude. I knew she provided fantastic value to the company, but she couldn’t give 100% of her talents and energy when she wasn’t treated equally. However, letting go of the idea that “I started this, so it’s my way or the highway” and bringing her on as a legal partner has made the business something I couldn’t on my own.
Ensuring that your partnerships are legally defined, with specific duties and roles assigned, is essential to creating a solid company structure that will meet the needs of your business plans. If something happens, and it will, having the documentation will also help transition roles and ownership.
Creating Healthy Boundaries
Running a business as husband and wife is not easy, with the potential for conflict to spill over into personal and work time.
In creating our exit strategy, we defined what we want to do and what we value in the business. We looked out our skill sets and our personalities and established a very clear business structure. We also determined that our company has two exit paths for us: to continue running the business well into our retirement age or to prepare it to sell. Our exit plan has contingencies for both of those paths and what will happen if we should divorce.
When making your exit plans, you are crafting the structure to allow your business to survive past you and your partners. This means that all parties must be candid with what they want and, more importantly, what they don’t. You can’t rely on assumptions and well wishes to be carried out in times of stress. All parties must agree to the plan and be committed to seeing it through.
Consider the Legal and Financial What If’s
A business is a living and growing entity that will change over the course of its life. With each of those changes, you will find new legal considerations and financial obligations to be discussed. For example, what happens if you need to file for bankruptcy? Who handles the paperwork and the negotiations? How will the assets and the debt be split? Conversely, when your business is expanding, systems may be developed that are proprietary to your organization. Who owns that intellectual property?
Your business plans and exit strategies will need to evolve as your business changes. Therefore, it’s essential to document these changes as they come up to avoid any confusion or legal issues.
Making an exit strategy can be uncomfortable, raising legal and emotional issues that must be dealt with. But, to save money and time, it’s always better to have these conversations before they become an issue. You started your business because you believed in it. By having an exit plan, you give it the legs to live beyond you. And isn’t that what every entrepreneur wants?
Sean Dowdell is known as the Tattooed Millionaire, which is also the title of his first book (2017). In addition to his role as founder and CEO of Club Tattoo, he is a drummer with Grey Daze. He is a frequent speaker to a variety of audiences and has been featured in Entrepreneur, GQ, Billboard, and on CNBC, A&E and more. Thora Dowdell was formerly in marketing and sales before becoming a business partner with Sean, initially in the music recording industry and later in Club Tattoo. Thora is passionate about empowering women business owners through her story. Together, the husband-wife team have authored the new book, Brand Renegades: Our Fearless Path from Startup to Global Brand (Entrepreneur Press, May 25, 2021).