Almost every owner I meet says they want to sell in three to five years. Very few are building a company anyone would buy.
The common belief is that exit planning starts when you hire a banker. It doesn’t. It starts the day you open your books.
What the best outcomes have in common
Long before they talk to a buyer, the owners who do best at the closing table have three things.
1. Clean financials. Monthly statements on GAAP, with revenue recognized correctly, not a spreadsheet held together with lookups. Buyers will rebuild your numbers in diligence. If their version doesn’t match yours, the price moves, and so does their trust.
2. Gross margins by customer segment that survive a quality of earnings review. Buyers want to know which customers and products actually make money. If you can’t show margin by segment, they’ll assume the worst about the ones they can’t see.
3. Revenue that isn’t concentrated in two or three accounts. One customer at a third of revenue can cost a full turn of EBITDA in valuation.
The gap
The gap between “I want to sell” and “I’m ready to sell” is usually 18 to 24 months of financial cleanup, and most of it could have been avoided.
What 18 to 24 months of preparation looks like
- Months 1 to 6: monthly close on time and on GAAP. Revenue recognition reviewed. One version of the numbers.
- Months 6 to 12: margin by customer and product. Add-backs documented as they happen, not reconstructed later. Working capital tracked monthly.
- Months 12 to 18: concentration addressed with contracts and new accounts. Key relationships moved beyond the owner.
- Months 18 to 24: an outside review of the numbers, the way a buyer’s team would do it, then a decision on timing.
It’s just good management
The best exit prep doesn’t feel like exit prep. It feels like running a well-run business. Clean books, documented decisions and a company that doesn’t depend on you are what buyers pay for, and they make the business better to own in the meantime.
Are you building a company someone would want to buy, or just one you want to sell?
Common questions
How early should I start preparing to sell?
Two years is a good target. Some fixes, like customer concentration, take that long. Clean books and good reporting take less time but need a track record before buyers trust them.
Do I need audited financials to sell?
Not always for a middle-market sale. But you need financials that hold up when a buyer’s accountants rebuild them. Many sellers get an outside review before going to market.
What’s a quality of earnings report?
A deep review of your financials, usually done by an accounting firm for the buyer, that tests your revenue, EBITDA and adjustments. It’s where most surprises in a sale come from.
Can I fix problems during the sale process?
Some, but it’s expensive. Once a buyer finds an issue, you’re negotiating from a weaker position. Fixing it before you go to market is almost always cheaper.
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