Exit Planning: How to Prepare Your Business for a Sale
The best time to start preparing a business for sale is two or three years before you want to sell it. That is how long it takes to fix the things buyers discount most: a business that cannot run without you, numbers that do not reconcile and revenue that depends on a handful of customers. This playbook lays out the work in order.
Key takeaways
- Buyers pay for transferable, predictable cash flow. Exit planning is the work of making your cash flow transferable and predictable.
- Start with the owner: if the business needs you, it is a job, not an asset. Build the team and systems that let it run without you.
- Clean, accountant-prepared financials that match the tax returns are the single biggest trust signal in due diligence.
- Decide who the likely buyer is early, because a strategic acquirer, an individual and a private equity group each value different things.
Most owners sell a business once. Most buyers, brokers and advisors have done it many times. That imbalance is why unprepared sellers end up with lower prices, longer deals and more of the price tied to earn-outs they do not control. The Exit Planning Institute, which trains advisors in this field, has reported through its State of Owner Readiness surveys that a large majority of owners have no written exit plan, even though most of their personal wealth is tied up in the business.
This playbook assumes you own an established, profitable small business and want to sell it to a third party within the next two to four years. It is organized as phases, each with specific tasks. Legal and tax rules differ by country, so the examples are mostly from the US and you should involve local advisors early.
Phase 1: Decide what you want (months 1 to 2)
Exit planning starts with the owner, not the business. Three questions set the direction:
- What do you need from the sale? Work out, with a financial planner, how much you need after tax to fund what comes next. Compare that with a realistic valuation of the business today. The gap is what the next two years of work must close.
- What kind of exit do you want? A full sale and clean break, a sale with a transition role, a partial sale to a partner or investor, a sale to employees or management, or a transfer to family. Each has a different buyer, price and timeline.
- When? Pick a target window, not a date. Markets, interest rates and your industry's cycle all affect price, and a window gives you room to sell when conditions are good rather than when you are tired.
Common mistake
Deciding to sell because of burnout, a health problem or a cash crunch, and then rushing to market. Buyers can tell, and a distressed seller gets a distressed price. If you are exhausted, hire a manager first, recover and then sell from strength.
Phase 2: Get a baseline valuation (month 2)
Ask a business broker or valuation professional for an opinion of value and, more importantly, a list of the factors holding the number down. The valuation methods for small businesses are well established: a multiple of seller's discretionary earnings for owner-run companies, a multiple of EBITDA for businesses with management in place, with asset value as a floor. The multiple moves with risk, and the risk factors are what the rest of this playbook addresses.
Worked example
Imagine a commercial cleaning company with $1.6 million of revenue and $320,000 of seller's discretionary earnings. The owner manages all client relationships, one contract is 30% of revenue, and the books are kept on a cash basis with several personal expenses mixed in. A broker suggests a multiple of 2.2, or about $700,000. Over two years the owner hires an operations manager, wins six new contracts that bring the largest client below 15%, moves to accrual accounting with monthly accountant-reviewed statements and removes the personal expenses. SDE falls slightly to $290,000 because of the manager's salary, but the broker now suggests a multiple of 3.2, or about $930,000. The business sells for more despite earning less, because it is less risky to own.
Phase 3: Reduce owner dependence (months 3 to 18)
This is the longest and most valuable phase. A buyer is asking a simple question: what happens the day after you leave? If the answer is "customers call me, suppliers call me, staff ask me what to do," the buyer is purchasing a business that will shrink the moment you go.
- Hire or promote a second-in-command. Someone who can run operations day to day. Give them real authority and a track record a buyer can see, ideally a year or more before the sale.
- Move customer relationships to the team. Introduce account managers, put a second contact on every key account and step back from day-to-day client calls. Buyers check whether customers know anyone other than the owner.
- Document how the business works. Written procedures for sales, delivery, invoicing, hiring and quality. They do not need to be elegant. They need to exist and to be used.
- Take a real vacation. Two or three weeks with no calls. What breaks is your to-do list for the next six months, and a buyer will find it reassuring that you did it.
- Put contracts in the company's name. Leases, supplier agreements, licenses and customer contracts should be assignable to a new owner. Anything tied to you personally needs to be moved.
Pro tip
Track the share of revenue from customers that you personally brought in and still personally manage. Set a target to bring it below a quarter of revenue by the time you go to market. It is one of the clearest numbers a buyer will ask about.
Phase 4: Clean up the numbers (months 3 to 12)
Due diligence is where deals die. A buyer's accountant will compare your financial statements with your tax returns, bank statements and customer invoices, and every discrepancy costs you either price or trust.
- Move to accrual accounting if you are not already there, so revenue and costs are matched to the periods they belong to.
- Separate personal from business. Stop running personal expenses through the company. Legitimate add-backs are fine, but a long list of them invites skepticism.
- Get accountant-prepared statements. Reviewed statements, or audited statements for larger businesses, carry more weight than internally produced reports. Three years of them is the standard ask.
- Reconcile everything monthly. Bank, credit cards, loans, payroll and sales tax. A buyer will test this.
- Fix the balance sheet. Write off uncollectible receivables, count and value inventory, record all liabilities and resolve any shareholder loans.
- Build a monthly reporting pack. Revenue by customer and product, gross margin, overheads, cash and a short commentary. Twelve months of consistent reports show a buyer the business is managed, not just operated.
Phase 5: Strengthen the business itself (months 6 to 24)
With the owner and the numbers in order, work on the drivers of the multiple.
| Driver | What buyers want to see | Practical moves |
|---|---|---|
| Customer concentration | No customer above 10% to 15% of revenue | Win new accounts in the segment where you are strongest; sign multi-year renewals with the largest clients |
| Recurring revenue | Contracts, retainers, subscriptions, maintenance plans | Convert project customers to service agreements; introduce an annual plan |
| Growth | Three years of rising revenue and stable or rising margin | Raise prices where you have under-priced; cut unprofitable lines; invest in the channel that works |
| Team | Key staff on contracts, low turnover, no single point of failure | Retention bonuses tied to the sale for key people; cross-training |
| Legal hygiene | No open disputes, licenses current, IP owned by the company | Settle or document disputes; register trademarks; confirm employment contracts and non-competes where enforceable |
| Assets | Equipment maintained, lease secure | Negotiate a lease extension with assignment rights before going to market |
Phase 6: Understand your buyers (months 12 to 24)
Different buyers value different things, and knowing who is likely to buy shapes how you present the business.
Buyer types and what they pay for
- Individual buyer: a stable, well-documented business they can run; often financed with a bank loan and a seller note
- Strategic acquirer: customers, capabilities or territory that fit their business; may pay more for synergies
- Private equity or search fund: EBITDA, growth potential and a management team; prefers larger businesses with recurring revenue
- Management or employees: continuity; often structured over time, sometimes through an employee ownership trust or plan
Common deal structures to understand
- Asset sale vs. share sale: different tax and liability outcomes for each side; most small deals in the US are asset sales
- Seller financing: you lend the buyer part of the price, typically 10% to 30%, repaid over several years
- Earn-out: part of the price paid only if revenue or profit targets are met after the sale
- Transition period: a few months of your time included in the price, with longer consulting paid separately
Phase 7: Assemble the team and go to market (months 18 to 30)
- Business broker or M&A advisor. Brokers typically handle sales under a few million dollars and charge a commission, often around 8% to 12% of the price for small deals, falling as deal size rises. Advisors for larger deals charge a retainer plus a success fee. Ask about their recent sales in your industry and how they will find buyers.
- Transaction lawyer. Someone who does business sales regularly, not your general lawyer. They will draft or review the letter of intent, purchase agreement, non-compete and transition agreement.
- Tax advisor. Involve them before the letter of intent, because the structure of the deal determines what you keep. In the US, how the price is allocated among asset classes in an asset sale affects both sides' taxes; in the UK, reliefs such as Business Asset Disposal Relief have conditions that must be met in advance. Rules change, so get current advice.
- Financial planner. To make sure the after-tax proceeds support the life you planned in Phase 1.
Your advisor will prepare a confidential information memorandum, approach buyers under non-disclosure agreements, collect indications of interest and manage the process through letter of intent, due diligence and closing. Expect six to twelve months from going to market to closing for a typical small business sale, and expect to keep running the business well throughout, because a dip in performance during due diligence is the most common reason prices get renegotiated.
Phase 8: Protect value during the deal
- Keep the sale confidential until the deal is certain. Staff, customers and competitors all react badly to uncertainty.
- Prepare a data room in advance: three years of financials and tax returns, contracts, leases, employee list and terms, licenses, insurance, equipment list, customer and supplier concentration reports.
- Answer diligence requests quickly and completely. Delay reads as concealment.
- Negotiate the non-compete carefully. Its length and geography should be reasonable for the buyer's protection and no more.
- Plan retention for key staff, with bonuses tied to staying through the transition.
Action checklist
- Write down what you need from the sale, the kind of exit you want and your target window
- Get a baseline valuation and a written list of the factors holding it down
- Appoint or hire a second-in-command and start moving customer relationships to the team
- Move to accrual accounting, separate personal expenses and get accountant-prepared statements
- Set targets for customer concentration and recurring revenue and track them monthly
- Renew the lease with assignment rights and move all contracts into the company's name
- Engage a tax advisor before you talk to any buyer
- Build the data room twelve months before you go to market
Frequently asked questions
How far in advance should I start?
Two to three years is the practical minimum if the business depends on you or the records need work. If the business already runs without you and has clean statements, twelve months is enough to prepare the data room, line up advisors and choose the timing.
Should I tell my employees I am selling?
Not until the deal is close to certain, except for the one or two key people whose cooperation you need in diligence, who should be told under confidentiality and usually offered a retention bonus. Early announcements cause staff to leave and customers to worry, which hurts the price.
Is it better to sell to a competitor?
Competitors may pay more because of synergies, but they are also the riskiest buyers to share information with. Use a staged disclosure process managed by your advisor, and only share detailed customer data late in diligence.
What if the valuation is less than I need?
Then the plan is to grow value before selling, which is what Phases 3 to 5 are for. Alternatively, consider a partial sale that brings in a partner or investor to fund growth, or a structured sale to management over several years. A financial planner can help you test whether a smaller number, invested well, is enough.
Related reading
The bottom line
A business sells for a multiple of its earnings, and the multiple depends on how much a stranger can trust those earnings to continue without you. Exit planning is the work of earning that trust in advance: a team that runs the business, books that match the tax returns, customers spread wide and contracts that transfer. Start early, get a baseline valuation, fix what holds it down and assemble advisors before you talk to a buyer. The owners who do this sell for more, close faster and keep more of the price.
