How to Prepare a Business for Sale: The Twelve Month Plan

Months one through three: get the numbers right

Everything else depends on the financials, so they come first.

Bring the books current. Buyers expect monthly P&Ls and a balance sheet that reconciles to the bank statements. If your bookkeeping is quarterly, or your accountant only sees the numbers at tax time, change that now. A buyer who asks for last month's P&L and gets it the same day trusts the business. A buyer who waits three weeks assumes there is a problem.

Reconcile the tax returns to the P&Ls. If they do not match, there needs to be a written explanation for every difference. Lenders underwrite off tax returns, so the return is the number that gets financed, whatever the P&L says.

Build the add-back schedule. Go through three years of general ledgers and tag every expense a new owner would not have. Personal vehicle, personal travel, family members who do not work in the business, one-time costs. Pull the document for each one. This schedule is what your business will be priced on, and it takes weeks to do properly.

Get a written valuation from the financials, with the earnings basis, the multiple range sourced from closed transactions in your industry, and what you would net after fees and taxes. This tells you whether the number works for you and, if it does not, what to fix. We provide this at no charge, and it is the right first step whether or not you end up listing with us.

Months four through six: reduce the risk a buyer sees

A buyer's price is a bet on the earnings continuing. Anything that makes that bet riskier lowers the multiple.

Owner dependency. Write down what you do every week that nobody else can do. Then start handing those tasks to someone. Customer relationships that live on your cell phone, vendor negotiations, quoting, hiring, the software only you know. A business that runs for a month while the owner is away is worth more than one that cannot.

Customer concentration. If one customer is more than 15 to 20 percent of revenue, buyers will discount the price or ask for an earnout tied to keeping that customer. The fix is to grow other accounts, or to get the large customer under a written contract with term left on it. Even a one-year agreement changes the conversation.

Key employees. Identify the two or three people a buyer would need to keep. Consider stay bonuses tied to a sale, or at minimum make sure they are paid at market so they are not a flight risk. Buyers ask about this in the first meeting.

Contracts. Get customer agreements, vendor agreements, and service contracts in writing where they are not. Check whether existing contracts have change of control clauses that require consent on a sale. A contract that terminates when the business is sold is worth nothing to a buyer.

Months seven through nine: fix what shows

The lease. This is the item that stops more small business sales than any other. A buyer, and especially a buyer's lender, needs a lease term that runs at least as long as the loan, usually ten years including options. If you have two years left, go to the landlord now and negotiate an extension or options. Do it before you are under contract, when the landlord does not know you are selling and has no leverage.

Licenses and permits. Confirm every license is current and find out which ones transfer with a sale and which require a new application. In California, a liquor license transfer through ABC takes months and has its own process. Health permits, contractor licenses, and professional licenses each have their own rules.

Equipment. Buyers walk the facility. Deferred maintenance gets priced in, usually at more than it would cost to fix. Service what needs service and document it.

Legal and tax. Resolve open litigation if you can. Clear any tax liens. Confirm sales tax, payroll tax, and income tax filings are current, because in California the buyer will need tax clearance certificates before escrow closes and an open balance stops the sale.

Entity cleanup. Make sure the corporation or LLC is in good standing with the Secretary of State, minutes are current, and ownership is documented. If there are partners, get the sale authorization in writing now.

Months ten through twelve: package it

Assemble the data room. Ten sections: business information, financials, customers and contracts, products and services, sales and marketing, team, operations, intellectual property and technology, legal and tax, vendors and suppliers. Every document a buyer will ask for in diligence, organized before the first buyer asks. A complete data room on day one of diligence cuts three to six weeks off the close.

Run the business hard. Buyers look at the trailing twelve months more than any other period. The worst time for a soft quarter is the quarter before you list. Do not stop marketing, do not stop hiring, do not let receivables slide because you are focused on the sale.

Keep it quiet. Do not tell employees, customers, or vendors. The people who need to know are your accountant, your attorney, and your advisor. Everyone else finds out when the deal is done.

Decide what you want. Cash at closing, or are you open to carrying a note. How long you will stay for transition. Whether you would consider staying on as an employee. What you will not accept. Knowing this before offers come in makes negotiation faster and keeps you from agreeing to terms you regret.

If you only have three months

Do the financials and the add-back schedule, get the valuation, talk to the landlord, and assemble the data room. Skip the rest and price the business for what it is. A clean SDE case for an owner-operated business sells. An unfinished attempt to make it look like something else does not.

What each quarter is worth

It helps to think about the plan in terms of what each stage does to the price.

The financial cleanup in the first quarter does not raise earnings, but it makes the earnings believable, which moves the business from the bottom of the multiple range toward the middle. On a business with $400,000 in SDE, the difference between a 2.2 and a 2.7 multiple is $200,000.

The risk work in the second quarter moves the business from the middle of the range toward the top, and on some businesses it changes the buyer pool. A business that a private equity add-on program will consider sells for more than one only individuals will consider.

The fixes in the third quarter remove the reasons a deal falls apart. They do not raise the price so much as they protect it. A lease extension does not add a dollar to the valuation, and without it there may be no sale.

The packaging in the fourth quarter is about speed. A complete data room and a well-written memorandum cut months off the process, and months are money in confidentiality risk and in the chance of a soft quarter.

Who does the work

The owner does the parts that require the owner: deciding what to fix, handing off relationships, talking to the landlord, and running the business hard. The bookkeeper and CPA do the financial cleanup and the add-back documentation. The attorney reviews the lease, the contracts, and the entity records. We do the valuation, the market research on multiples, the buyer identification, the memorandum, the data room structure, and the sequencing, and we tell the owner which of the items above will move the price for their specific business and which will not.

Not every business needs every step. A landscaping company with 300 residential accounts does not have a concentration problem. A software company with no facility does not have a lease problem. The plan is the full list. The work is the parts that apply.

What preparation is worth

An owner who adds $75,000 in documented SDE through add-back work and a margin fix, extends the lease, and reduces one customer from 35 percent of revenue to 20 percent has changed the price by several hundred thousand dollars and changed the buyer pool from individuals needing seller financing to buyers who can close with a bank loan.