Here is the last blog in this series of pitfalls to avoid before entering an entrepreneurial business partnership. Although this may seem counter-intuitive, it is important to create an exit strategy before entering the entrepreneurial business partnership.
Listed below are the problems and potential dangers for the business and the partnership that you want to avoid by not having an exit strategy.
Difficulty creating clear expectations, goals, timelines for achieving these goals and strategies. You may unknowingly limit your growth opportunities because you may be too focused on running the day-to-day operations of the business and not thinking strategically for long-term growth. Consequently, you won’t know when and how to expand your business, and into what new markets.
Challenges raising capital. Investors may be hesitant to invest in a business without a clear exit strategy, leading to difficulty growing the business while also limiting the scope and success of the business.
Difficulty dissolving the partnership. Without an exit strategy, the ability to dissolve the partnership or sell one partner’s share of the business can be extremely compromised. This may lead to a protracted and expensive legal battle – which is often financially and emotionally draining. It may also lead to tax implications when trying to transfer ownership.
An exit strategy helps protect each partner’s capital investment in the business because it provides clear guidelines for how each partner can recoup their investment in the business if the business fails or how each partner will profit if the business is successful. Additionally, when you are ready to sell your company, you may not be able to get a fair price for your investment.
Steps to Avoid Pitfall #7:
To avoid the potential dangers of not having an exit strategy, take the following steps.
Discuss and agree on an exit strategy before entering a partnership. Have a very detailed discussion about the long-term goals for the business. Consider what you want the business to look like and where you want it to be in the next 3, 5, 7 or 10 years from now. Consider different case scenarios including selling the business, taking it public, or buying out one partner’s shares of the business.
Once you have agreed upon an exit strategy, put it in writing as part of the entrepreneurial agreement. This will ensure that both partners are on the same page and can be referred to if any disputes arise in the future.
Continually review and update the exit strategy to make sure both partners remain aligned with its goals and the current state of the business (which may have changed from the time the partnership began).
If necessary, write down any necessary updates to the exit strategy that have been discussed and agreed upon, reflecting its status.
If necessary, seek professional advice from a legal and/or financial professional to make sure the exit strategy is legally sound and that financial ramifications such as tax responsibilities are considered.
Developing an exit strategy is crucial for any business partnership, as it provides clarity and ensures that all partners are on the same page. By identifying the reasons for the exit, evaluating the company’s value, deciding on the exit method, planning the timeline, and documenting the exit strategy, business partners can avoid conflicts, loss of potential value, and uncertainty for employees.
Dr. Patty Ann
