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Developing an Exit Strategy: Start the Race with the Finish Line in Sight

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Before you create or rewrite your business plan, I would like you to
think about the concept of planning your exit strategy. An exit strategy
is not a plan for failure. It’s a plan for success. Developing an exit
strategy before you work on your business plan will enable you to make the
best decisions for your company. I think that as you read this two-part
article, you’ll come to understand why an exit strategy is important and
how you can apply it to the business planning process.

Where Is the Finish Line?

Have you ever seen runners line up for a race not knowing where the
finish line is? This would never happen, right? Whether you’re starting a
new business or expanding a current business, the implication is the same.
Before you begin the race, you need to know where you expect to

Businesses (publishing companies) are started for many reasons. Some of
the more common reasons include:

  • Building a successful publishing business
    for yourself instead of for someone else

  • Pursuing a passion
    (e.g., “I’ve always wanted to own a publishing company.”)

  • Being your own boss and
    the master of your own time

  • Earning money doing
    what you really like to do (writing, woodworking, quilting, photography,

  • Capitalizing on an
    invention or a new idea

  • Replacing income from
    the loss of a job

  • Creating net worth
    (long-term capital appreciation).

It’s also inherent in the makeup of entrepreneurs to think early on
about future expansion of their enterprises. What new products or services
can be added? Can new markets be reached? Can the business use more
employees? Can it open more offices?

The list of reasons for start-up and expansion could go on and on.
What’s really important, though, is to understand that, in all cases, it’s
critical to develop an exit (liquidity) strategy.

Developing an Exit Strategy

Is the Secret

It’s a given that professional investors (i.e., Venture Capitalists)
will require a well-thought-out exit strategy as part of the business plan
for any venture in which they plan to invest. However, most entrepreneurs,
intent on creating an immediate source of income or just caught up in the
excitement of launching or expanding their businesses, have a habit of
overlooking the “finish line.” Consequently, they are unprepared for this
certain-as-taxes event.

So What Should

Your Strategy Be?

Before we go any further, you need to understand that there are no
right or wrong strategies—only different ones. Your strategy should
fit your goals. The logical place to start is with your long-term
goals. The most obvious and often cited goal is retirement. Some
entrepreneurs like to develop one business and then leave it to start
another venture. You may have other reasons that you foresee will
eventually cause you to exit your own business. Whatever your goals may
be, there are three things that you need to know before you begin to build
a better business plan:

1. Where you are headed

2. When you want to get there

3. What your business (publishing company) will look like when you

What Are the Exit Possibilities?

Some of the potential forms of exit include:

  • Selling all or a portion of the business: It may be possible to sell the business outright to an independent
    buyer. If this is the case, you’ll want to maximize the net income of the
    business. Keep in mind that you should avoid having assets tied up in the
    business which you intend to later keep in your personal

  • Passing the business to a family member: This can be a good way to transfer value to your heirs in a way that
    minimizes estate taxes. Proper structuring is important, as well as
    determining who will run the business.

  • Selling to an Employee Stock Ownership
    Plan (ESOP):
    This can be a valuable vehicle when the new owner group
    is comprised of key employees in the business. There are certain tax
    advantages to ESOPs. Existence of the ESOP can also add to the value of
    the enterprise by giving employees a sense of ownership in the

  • Taking the company public: For those
    interested in gaining liquidity quickly while having the option to share
    in future stock appreciation, this might be a good option. The
    complexities of this form of exit are substantial, as is the demand on
    management’s time leading up to and continuing on after the “event.” This
    option is not for the faint of heart!

  • Liquidation: In some cases, the best
    option to gain liquidity may be to simply discontinue conducting business,
    in which case you would sell off the business assets, pay off creditors,
    and keep the proceeds (after taxes, of course). While this is, in some
    respects, the simplest option, it often yields the least return to the
    owners because there is little or no value given for the “going concern”
    or goodwill of the business. This is often the method used when the
    business value is closely tied to real estate or other productive assets.
    It’s also common for sole proprietor service businesses where income
    production is dependent solely on the owner practicing his or her

Each of the above involves a variety of considerations. For
instance, if you plan to sell the business, what kind of market can you
expect for your type of business? How big might it need to be to achieve
optimal value? If you plan to pass it on to a family member, who will that
be? How will you train them to run the business? Will the person you have
in mind to succeed you be interested in taking over when you are ready to
get out? When will you need to begin the transition? Many of these
questions are difficult to answer, but ultimately your successful exit
will depend on it.


Once your exit strategy is in place, you’ll be in a good position to
make some major decisions about your business. These decisions include the
type of financing you want to pursue, the legal structure to choose, and
the tax issues you should consider. Part II of “Developing an Exit
Strategy” will cover these various issues. Look for this second article in
an upcoming issue of the PMA Newsletter.

Linda Pinson runs an award-winning small-business publishing company
called Out of Your Mind… And Into the Marketplace. She is also developer
of the software, “Automate Your Business Plan 9.0,” and author of the
book, “Anatomy of a Business Plan.” You’ll find her Web site at
www.business-plan.com. John P. Neal is an expert in business exit
strategizing. He is CEO of the Ace Group Inc. of Solana Beach,

This article is from thePMA Newsletterfor August, 2000, and is reprinted with permission of Publishers Marketing Association.

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