How to Prepare a Business for Sale
Preparation is the part of a sale that owners control most. Businesses that are ready for buyer scrutiny before going to market are best positioned to achieve stronger offers, fewer surprises in diligence and a faster path to closing.
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Preparing a business for sale means looking at your company the way a buyer will, then addressing the issues that would lower its value or slow down a sale. The work spans reviewing financial reporting, operations, management and your own plans after the sale. If you share information with buyers before your business is truly ready, you risk materially reducing what they will be willing to pay. We help owners prioritize what impacts the value of their business most, whether a sale is months or years away.
The degree of a company’s preparation directly impacts buyers’ perception of the strength and value of that business, and materially impacts how quickly your business can move through diligence. The longer diligence takes, the more likely a problem is to arise that can jeopardize the value of your deal or whether a deal happens at all. Every unanswered question, undocumented number or unresolved issue buyers find in diligence becomes a reason to lower the price, change the terms or walk away. Preparation allows you to present a desirable, well managed business to buyers with a consistent story throughout the process.
Preparation also protects your time. Diligence is the most demanding stage of a sale for owners and management (see the sale process and timeline). A business with organized records and clean financials answers buyer questions faster and keeps the process on schedule.
Well-prepared businesses typically benefit in three ways:
- Higher value. Financials that present a consistent story and buyers can verify give buyers confidence to value the business at a higher multiple than an unprepared business.
- Better terms. Fewer diligence concerns mean less pressure for price reductions, escrows, earnouts or special indemnities.
- Faster, more certain closing. Buyers who are not surprised in diligence are less likely to delay, re-trade or withdraw.
Financial readiness means a buyer can verify your earnings quickly and confirm they are sustainable. It is one of the most important areas of sale preparation, because buyers of lower middle market companies typically set value as a multiple of adjusted EBITDA (see business valuation).
- Three or more years of financial statements that tie to tax returns. Reviewed or audited statements carry more weight with buyers than internally prepared ones.
- Defensible adjusted EBITDA. Every add-back, such as owner compensation above market rates, one-time expenses or personal expenses run through the business, should be supported by invoices, payroll records or other documentation.
- Normalized net working capital. Understand your typical levels of receivables, inventory and payables. Buyers set a working capital target for closing, and it directly affects your sale proceeds.
- Accrual-basis accounting and timely monthly closes. Buyers analyze monthly and trailing-twelve-month results, so your books should close accurately each month.
- Tax compliance. Resolve any open issues with income tax, sales tax, payroll tax or worker classification before a buyer finds them.
- A sell-side quality of earnings (QoE) report. An independent QoE report before going to market is meant to validate adjusted EBITDA and the seller’s view of normalized net working capital. These reduce the risk of a price reduction later in the process.
Buyers look past the financials to understand whether the business will keep performing after they buy it. Operational, legal and customer issues are common sources of diligence surprises.
- Customer concentration. Buyers view one customer or a small group of customers accounting for a large share of revenue as risky. Diversifying revenue, or securing longer-term contracts with key customers, can reduce perceived risk.
- Institutionalization. Documented operating procedures and reliable systems show that the business does not depend on any one person’s knowledge.
- Contracts. Review customer, supplier, lease and financing agreements for change-of-control or assignment clauses that require consent from the other party. Put important verbal arrangements in writing.
- Corporate records. Make sure ownership records, organizational documents, board or member approvals and any equity grants are complete and up to date.
- Intellectual property. Confirm that the company, not an individual owner or contractor, owns its trademarks, software, domain names and other intellectual property.
- Licenses, permits and compliance. Confirm that required licenses and permits are current and transferable, and that the business complies with environmental, safety and industry regulations.
- Litigation and disputes. Resolve outstanding disputes where possible, and be ready to explain any that remain.
- An organized document library. Gather contracts, leases, employee records, tax filings, insurance policies and asset schedules in one place. This becomes the foundation of the data room buyers will review.
Private equity firms typically invest in businesses with a fully functioning management team that has been and will continue to run the business post-acquisition. Other buyer types may have more flexibility regarding management, but buyers pay more for a business that can run without its owner. Reliance on the owner is one of the most common drivers of low valuation.
- Build a second layer of management. Ensure leaders of sales, operations and finance have real authority, responsibility and institutional knowledge before a sale.
- Institutionalize key relationships. Important customer and supplier relationships should be held by the firm, not a single person.
- Retain key employees. Consider retention bonuses or other incentives for people who are critical to the business through a sale and the transition that follows.
- Plan your own role. Decide whether you want to leave at closing, stay for a transition period, or remain involved with a rollover equity stake. Different buyers have different expectations, and your preference shapes which buyers are the best fit.
- Align all owners. If there are multiple shareholders, agree on goals for price, terms and timing before going to market.
The right time to start preparing depends on how ready your business already is. Businesses with steady results, three or more years of clean financials, a leadership team that can run the business without the owner, and organized documentation are best served by speaking to an M&A advisor 3 to 12 months before they want to launch a sale process.
Businesses that need to improve financial reporting, reduce reliance on the owner or better systematize the business are best served by starting 24 to 48 months ahead. That leaves time to fix issues that lower value and to build a track record of results that buyers can rely on.
Starting early also gives you time to coordinate with your CPA, attorney and wealth advisor on tax planning, deal structure and personal financial planning, which can materially affect what you keep after a sale.
Use this checklist to gauge how prepared your business is and speak with an M&A advisor or investment banker before speaking with buyers:
- Three or more years of financial statements that tie to tax returns
- No single customer accounting for a disproportionate share of revenue
- A leadership team that can run the business day to day without the owner
- Key employees identified, with retention plans where needed
- Adjusted EBITDA with documented support for every add-back
- Monthly accrual-basis financials closed on time
- Personal expenses separated from business expenses
- No open tax, payroll or worker classification issues
- Key customer, supplier and lease contracts reviewed for change-of-control clauses
- Corporate records, ownership documents and intellectual property ownership confirmed
- Licenses and permits current and transferable
- Contracts, employee records, tax filings and asset schedules organized in one place
- Owners aligned on goals for price, terms, timing and post-sale roles
How long does it take to prepare a business for sale?
Businesses with clean financials, a strong leadership team and accessible, organized records are best served by speaking to an M&A advisor 3 to 12 months before they want to launch a sale process. Businesses that need to improve financial reporting, reduce reliance on the owner or better systematize the business are best served by starting 24 to 48 months ahead of a planned sale.
Do I need a quality of earnings report before selling my business?
It is more important to obtain a sell-side quality of earnings (QoE) report prepared by an independent accounting firm the more complex your financials are and the more EBITDA adjustments you want to receive valuation credit for. Simple businesses that are confident their reported financials reflect the economic reality of the business may not need one.
What documents do buyers ask for in due diligence?
Buyers typically request three or more years of financial statements and tax returns, monthly financials, customer and supplier contracts, leases, debt documents, employee records and agreements, corporate and ownership records, licenses and permits, insurance policies, and schedules of assets and intellectual property. Organizing these before a sale process starts saves time and reduces surprises.
What should I avoid doing in the year before selling my business?
Avoid letting performance slip, making large unplanned investments or one-off changes that complicate the financial story, signing long-term commitments, and discussing a sale with potential buyers before getting advice. Buyers analyze the most recent twelve months closely, so steady, well-documented results matter most.
Not sure how ready your business is?
We can review your business as a buyer would, identify what may lower its value, and help you prioritize what to address before going to market. There is no cost and no obligation.
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