The 3-Year Exit Plan: Selling for More by Starting Early

The owners who get the most for their businesses have one thing in common, and it is not luck or a hot market. They started preparing years before they sold.

An owner who comes to us three years out can build something genuinely more valuable. An owner who comes to us three weeks out can only sell what they already have.

The short answer

Three years is an ideal time frame that lets improvements show up in the trailing financials buyers actually examine. Year one establishes your baseline and cleans the books, year two reduces risk and raises earnings, year three prepares the business for market. Each year compounds into the next, which is why the work cannot be rushed.

Why three years specifically

Three years is not arbitrary. It maps to how buyers and lenders evaluate a business.

Buyers look at your trailing financials — usually three years — to judge the business. Any improvement you make takes time to appear in that track record.

Clean up your books today, and a buyer three years from now sees three clean years. Clean them up right before selling, and a buyer sees just one clean year of financials, yet the other two years may appear disorganized. It’s better to have a consistent approach through all three years.

It is also long enough to make substantive changes — building a management team, developing recurring revenue, diversifying customers — that cannot be faked. Buyers can tell the difference between a business that has genuinely run well for years and one hastily polished for sale.

Year 1: Build the foundation

Get a real valuation. Before you can improve your value you need to know what it is. An honest opinion of value tells you where you stand, whether the number funds what you want, and how far you have to go. It also exposes the specific weaknesses dragging your multiple down.

Clean up your financials and your reporting. The foundation of everything else. Get the books accurate and organized.

If you have been minimizing reported income for tax reasons, understand that it will cost you at sale, and start reporting accurately now so you build the clean multi-year history buyers pay for. The math comes down to the overall profitability of the business.

Identify your risks. With your advisor, name the specific things a buyer will worry about: owner dependence, customer concentration, a short lease, a key employee, thin margins. That becomes your project list for the next two years. Our free exit readiness assessment scores your business against these same factors, which is a fast way to see where the gaps are before you build the list.

Year 2: Reduce risk and raise earnings

The middle year is where real value gets created, working the list from year one.

Reduce owner dependence. Make yourself replaceable. Document how the business runs, delegate relationships and decisions, build a management layer that operates without you. This moves your multiple more than almost anything else, because it addresses the buyer’s single biggest fear.

Diversify your customers. If one client is too large a share of revenue, add customers and, where you can, move big relationships onto contracts. This takes time, which is exactly why it belongs in the middle of a multi-year plan.

Improve margins and build recurring revenue. Focus on profitability rather than revenue, since buyers pay on earnings. Shed unprofitable work, raise prices where the market allows, and add whatever recurring revenue the business can support — predictable income commands a premium. Pay attention to your cost of goods sold as well: make sure it moves in lockstep with revenue and maintains consistent percentages. Many businesses hold their prices flat for too long, so revenue stalls while the cost of the materials and labor behind it keeps climbing.

Resolve the risks. Extend a short lease, secure a key supplier, put agreements in place with essential employees, clear up legal or compliance issues.

Year 3: Prepare to go to market

Assemble your documents. Get the diligence package in order — three years of clean financials, contracts, lease, corporate records — so you can produce anything a buyer asks for immediately. The list is in the due diligence checklist.

Do your tax planning. Work with your CPA well before the sale to model your after-tax outcome. Much of this must be set up in advance, and the gap between good and careless planning is large. See capital gains tax when you sell your business.

Get your advisors in place. Line up your transaction attorney, CPA, and broker before you list, so you go to market with experienced people already in your corner.

Time the launch. Choose your window based on the business’s performance and your own readiness. A business showing three years of improving, clean, well-documented performance is exactly what buyers pay premiums for.

Why the timing matters more now

There is a bigger reason to plan ahead than your own numbers.

Roughly 12 million U.S. businesses are owned by baby boomers aging toward the exit, and about 10,000 Americans turn 65 every day. A very large volume of business assets is expected to change hands over the coming decade.

More sellers arriving at once means more competition for the same buyers. Preparation is what separates a business that sells well from one that sits.

Improved earnings helps regardless of whether or not you sell

Three years sounds like a long time when you are ready to be finished. But the work is the same work that makes the business better to own in the meantime — cleaner books, less dependence on you, steadier revenue.

If you are somewhere in that window and want a candid read on where you stand and what to work on first, reach out.

Mark Herrmann is the founder of Trustmark Mergers & Acquisitions in Charlotte, North Carolina. This article is general information, not legal, tax, or financial advice.