You started a business or took ownership of it because you believed it would be profitable. The day-to-day reality can be more challenging than anticipated, and the prospect of making a profitable business exit may seem very far away. We mentioned exits, though, because shifting your perspective to prepare for an eventual (profitable) exit and working backward to the present can be surprisingly effective in increasing the business’s profits in the short-term!
Here’s why: You will exit your business one day – it’s as unavoidable as death and taxes. Your exit will either be planned or involuntary. Naturally, the first option is preferable! By being proactive and identifying how to make that exit as profitable as possible, you will build a resilient, high-value, high-performing business almost by default.
The natural next questions are, “What kind of business exits are possible? Which ones are the most profitable?” The answers are many, and it depends.
Five Profitable Business Exits
We’ve summarized five approaches commonly considered to be profitable ways to exit a business, but this is not an exhaustive list. Not all of them will fit your business, so we recommend seeking input from financial advisors, attorneys, and especially from Certified Exit Planning Advisors®.
1. Selling the business.
One of the most common ways to exit a business is by selling it to another individual or company. This can involve selling the entire business, including its assets and liabilities, selling only the assets, or selling a controlling stake to a strategic buyer. The sale price can provide a substantial profit if the business is profitable and has a strong market position.
Strategic buyers may be competitors, suppliers, or other companies operating in related industries. They are often willing to pay a premium for the business due to the value they can derive from the acquisition, for example: access to new markets, technology, or customer bases; or taking advantage of potential economies of scale.
2. Merger or acquisition.
Being acquired by a larger company can be a profitable exit strategy, especially if your business has unique assets, intellectual property, or a valuable customer base. Larger corporations may be willing to pay a premium to acquire smaller companies that can enhance their market position, diversify their offerings, or provide other strategic advantages. This allows for the combination of resources, expertise, and market share, leading to increased value and potential financial gains for the owner.
3. Initial Public Offering (IPO)
For larger and more established businesses, going public through an IPO can be a highly lucrative exit strategy, particularly if the business has strong financials, growth potential, and a solid market position. Going public allows the business owner to sell shares to the public at an offering price determined by market demand, potentially resulting in significant gains if the market responds favorably. The business can raise significant capital and provide an opportunity for the owner to sell their shares at a higher valuation.
However, going public involves complex processes, compliance requirements, and significant preparation and is rarely a viable option for smaller companies.
4. Leveraged or Management buyout (LBO/MBO)
In a leveraged buyout, a business owner sells the company to a private equity firm or a group of investors. Buyers typically finance their purchase through a combination of buyer’s equity and borrowed funds secured by the acquired company’s assets. Their end goal is to improve the business’s profitability and cash flow, ultimately enabling them to sell the business later at a higher valuation, generating substantial profits. (And our advice is to improve your profitability NOW so YOU’RE the one who generates the substantial profits!)
In a management buyout, the business owner sells the company to its existing management team. This can be a viable option when you have a capable and motivated management team in place that is interested in taking over the business. The owner can sell their shares to the management team, often with the help of external financing, and receive a profit from the transaction.
5. Employee Stock Ownership Plan (ESOP)
An ESOP is a type of employee benefit plan that allows employees to become owners of the company they work for by acquiring shares of company stock. ESOPs are typically established by companies to provide employees with an ownership stake and a financial interest in the organization’s success.
ESOPs offer several potential benefits to both employees and employers. For employees, they provide an opportunity to accumulate company stock and share in the company’s profits and growth. It can serve as an additional form of retirement savings, as employees can sell their shares when they leave the company or retire. ESOPs can also foster a sense of ownership and motivation among employees.
Employers may find ESOPs advantageous as they can be used as a tool for employee retention, motivation, and recruitment. ESOPs can also provide tax advantages to the company. Contributions to the ESOP are tax-deductible, and in certain cases, the company may even be able to deduct the principal and interest payments on the loan used to finance the ESOP.
Choosing a Profitable Business Exit
It’s worth mentioning that other exit strategies, such as liquidation or passing the business down to family members, may be more appropriate depending on the circumstances. The most suitable method of exit for you depends on various factors, including the nature of the business, its financial health, and your goals.
Once you’ve identified which exit makes the most sense for you, map out a plan to prepare for a profitable business exit. We strongly recommend that you consult with a Certified Exit Planning Advisor® along with financial and legal professionals experienced in business transactions. They can assist with determining the best strategies and implementing them to maximize profit and meet your specific objectives.