How to Prepare Your Business for Sale Two to Three Years in Advance

Advisory List recently asked three M&A professionals an important question:

What should business owners be doing two to three years before a potential sale?

My answer was straightforward: Build a business that can continue succeeding without you.

For many entrepreneurs, becoming indispensable is part of building a successful company. They develop the key customer relationships, make important decisions, resolve operating problems, and accumulate knowledge that no one else in the organization possesses.

That commitment may help build the business. When it comes time to sell, however, excessive dependence on the owner can become a significant source of risk.

A buyer is not only evaluating what the company earned under its current owner. The buyer must also be confident that the company can continue performing after ownership changes.

A Lesson I Learned Firsthand

The last business I owned and sold, in 2016, was supported by a strong management team, loyal employees, and customer relationships that did not depend entirely on me.

That structure expanded the pool of qualified buyers and gave the lender greater confidence in the transaction.

The eventual buyer had considerable management experience but limited experience in that particular industry. Because the company was not dependent on me to manage its daily operations, the transition presented less risk to both the buyer and the lender.

That experience reinforced something I regularly tell business owners:

A successful business is not necessarily a transferable business.

Transferability Takes Time

I generally recommend that business owners begin systematically reducing their daily involvement at least two to three years before a potential sale.

This does not mean stepping away from the business or becoming disengaged. It means deliberately building an organization that does not require the owner to remain at the center of every decision.

Important steps may include:

• Delegating key customer and vendor relationships

• Developing a capable management team

• Documenting systems and operating procedures

• Giving employees greater decision-making authority

• Reducing the amount of critical knowledge held exclusively by the owner

• Building more recurring and predictable revenue whenever possible

These improvements cannot be completed overnight.

Managers need time to assume greater responsibility. Customers need to develop confidence in other members of the organization. Processes that may have existed informally for years need to be documented, tested, and made repeatable.

The objective is to create a company that can transfer successfully to a new owner without disrupting its customers, employees, or financial performance.

How Owner Dependence Can Affect a Business Sale

When a business relies heavily on its owner, buyers frequently perceive greater risk.

That risk can result in:

• A lower valuation

• A smaller pool of qualified buyers

• Greater financing challenges

• A longer transition period

• Increased pressure for seller financing or an earnout

Conversely, a company that operates effectively without its owner looks much more like a transferable asset.

Reducing owner dependence is therefore more than an operational improvement. It can directly influence the company’s value, marketability, financing options, transaction structure, and likelihood of a successful closing.

Other Areas to Address Before Selling

Preparing a business for sale involves more than reducing its dependence on the owner. Business owners should also evaluate several other areas well before going to market.

Clean and Consistent Financial Records

Buyers and lenders want financial statements that are accurate, consistent, and easy to understand.

Legitimate owner benefits, discretionary expenses, and nonrecurring costs should be documented as they occur. Trying to reconstruct several years of potential adjustments shortly before a sale can create unnecessary questions and undermine a buyer’s confidence.

Customer and Vendor Concentration

A company that depends heavily on one customer, supplier, or source of revenue may present additional risk.

Concentration cannot always be eliminated, but owners should look for opportunities to diversify their customer base, strengthen contractual relationships, and develop additional sources of recurring revenue.

Documented Processes

Important procedures should not exist only in the owner’s head.

Documenting operating procedures, customer management practices, pricing methods, quality controls, and employee responsibilities can make the company easier for a buyer to understand and operate.

Intellectual Property and Digital Assets

Trademarks, patents, websites, domain names, social media accounts, proprietary processes, and other assets connected to the company’s goodwill should be properly documented and controlled by the business.

Ownership issues discovered during due diligence can delay a transaction or create uncertainty for a buyer.

Real Estate and Lease Continuity

If the company operates from leased property, the lease should provide sufficient continuity for a future buyer. Owners should understand assignment provisions, renewal options, and any landlord approvals that may be required.

If the owner also owns the real estate, the proposed sale or lease arrangement should be considered well before taking the business to market.

Build a Business a Buyer Can Take Over

If you are considering selling your business within the next several years, ask yourself this question:

What would happen if I were no longer here every day?

If your customers rely entirely on you, begin expanding those relationships to other members of your team.

If your managers cannot make important decisions independently, begin developing and empowering them.

If essential processes exist only in your head, document them.

If the company’s success depends primarily on your personal involvement, start building the people and systems needed to change that.

These improvements are difficult to manufacture after a buyer arrives. Two or three years before a sale, however, there is still time to build a company designed not only to perform, but also to transfer successfully to its next owner.

Begin Preparing Before You Are Ready to Sell

The strongest time to begin preparing a business for sale is before a sale becomes urgent.

Early preparation allows an owner to address weaknesses thoughtfully, improve financial performance, strengthen management, and reduce the risks buyers are likely to identify.

If you are considering selling your business within the next several years, Wright Business Advisors can help you evaluate its value, transferability, and readiness for the market.

[Contact Wright Business Advisors] to schedule a confidential consultation.

I appreciate Advisory List including my perspective in this important discussion. You can read the complete article and insights from all three M&A professionals here:

How to Prepare a Business to Sell: What Three M&A Professionals Want Owners to Know, Years Before They List

Wayne Wright, MCBI, CBI, CM&AP
Founder and Lead Advisor
Wright Business Advisors