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Before you enter a business, plan for your exit

Exiting, or selling out, your business to a third party can be the most profitable and exciting thing you can do in business. What's often unspoken, however, is that not every business that gets built is sellable – and winding down can be tricky for some.

If your business has lost money during startup – who hasn't? – or during tough times or through a failed expansion, those losses have likely been financed by debt. A line of credit, where no principal payments are required, is a common strategy for providing working capital during these times. You've probably personally guaranteed some debt or invested personally. Maybe you are dragging your feet on some bills?

No matter how you have managed to keep things going, if your business isn't recovering, you need to be thoughtful if you decide to close.

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Ideally, the fair market value of your assets, when liquidated, will be enough to pay off all your bills and outstanding obligations to employees and the government.

Also, don't forget lease obligations that may be on your income statement every month as an expense but is actually a long-term obligation that needs to be settled – including the rental of facilities. Not all small businesses recognize these obligations on the balance sheet, although they should.

Unfortunately, assumptions made on the resale value of inventory or equipment on your balance sheet can be aggressive. You never really know what something is worth until you sell it and, if you do so in distress – in a hurry – its full valuable may not be realized.

So what looks possible on paper doesn't add up in reality.

Alternatively, if you sell your assets to close your business and have money left over, you will still need to file a year-end statement and pay corporate income taxes. Don't forget payroll deductions, employee benefits and GST/HST remittances as well.

Not everyone is so lucky. Bankruptcy is unavoidable for some – about 130,000 businesses went bankrupt in Canada in 2011, 8.2 per cent fewer than in the previous year.

These are cases when the money owed cannot be covered by asset sales and debtors will be left unpaid. Hopefully, conscientious operators have reduced this exposure as much as possible, and shielded employees and their families to the extent that they can.

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Even bankruptcy won't shield you from all obligations such as, in some provinces, workplace health and safety insurance premiums and other taxes payable.

Your financial statements don't tell everything about your business but they also do not lie when it comes to the metrics you need to watch as your business delivers its goods or services. Make sure you are keeping a sober eye on the reality of your balance sheet and cash flow. Don't let your passion for the business cloud your objectivity on its ability to survive.

I've done my own bookkeeping since my first business, and have found tremendous value in reviewing month-end results, even in micro-businesses, so I can take corrective action as soon as I see trouble. If this doesn't interest you, find a part-time bookkeeper to keep your books up to date.

Planning on getting out of a business is as important as the plan to get in. The ideal time to create this strategy is before you open the doors. You owe it to yourself to understand the implications and procedures with which you may exit the business. Selling to a third party at a huge multiple is the goal – but your planning needs to consider alternative outcomes.

Often, entrepreneurs are too far behind before they realize they are in trouble. By then, their options may be limited.

So be pro-active about your exit:

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-- Build a plan for both startup and exit.

-- Keep score using monthly financial statements.

-- Be objective and react accordingly to ensure to get the happy ending we all strive for when we take on these endeavours.

Special to The Globe and Mail

Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.

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