How To Prepare Your Business For Sale In 5 Years

Most business owners start thinking about a sale 6 to 12 months before they want out. Depending on how they operate things, that time frame could be a little late if they are trying to get the maximum value for the business.

However, if a business owner gives themselves five years, they can sell a cleaner, more transferable company and keep more of the value they have built. At Crowne Atlantic Business Brokers, we have sold many hundreds of businesses since 2004. Most of the time, sellers who spend more time making their company look good get a better price for their business.  It is the same principle as cleaning up and making repairs to a car or a house prior to selling it.

Here is what buyers look for and encourages higher offers:

What Buyers Look For

Buyers are not paying more for the story behind the business. They are trying to buy cash flow with less risk and transferability. The files they request for due diligence tell you exactly what they care about. When businesses show less risk and more stability, buyers pay higher prices for those opportunities.

Clean books and records.

We always feel like we keep repeating ourselves when we talk about clean books and records, but we keep seeing disorganized ones. So, we feel compelled to continue to remind business owners to keep clean records of their earnings. If a buyer cannot trust the numbers, they will not pay a huge multiple for their purchase price. Buyers want organized financials, reconciled bank accounts, a working chart of accounts, and records that match the tax returns closely enough that a quality-of-earnings review does not blow up the deal.

Itemized, detailed expenses.

A Profit and Loss with “miscellaneous,” “owner expenses,” and giant catch-all categories is a red flag. Buyers want expenses broken out so they can see what it actually costs to run the company after they take over. Detailed expense reporting also makes it easier to identify legitimate add-backs later without looking like cash flow is being inflated.

Sales organized by category, not dumped into one line.

While this one is not as big of a deal, separating out revenue by service line, segment, product category, customer type, location, or job type is extremely helpful for buyers and for business owners themselves. That lets them analyze the mix, margin, seasonality, and growth. A contractor whose sales are split by residential, commercial, and service work is far more attractive than one who only shows a yearly total of sales.

Consistent sales and profits.

Buyers pay more for a trends that they can underwrite. Three to five years of stable or rising revenue and profit beats a spike in the last 12 months. A one-year jump looks like a good year. A five-year pattern looks like a business.

Profits on the tax returns, with as few frivolous seller deductions as possible.

This is one of the most expensive mistakes owners make. Running every personal expense through the company may save taxes today, but it can cost you a multiple of that savings at sale. Buyers start with tax-return profit labeled as Ordinary Income, which is not the “real number” the business owner quotes at the kitchen table. The more the buyer has to recast, the more of a discount the buyer will ask for and the less the bank will finance that buyer. A modest taxable profit that is clean is often worth more than a large “add-back” story.

Limited customer concentration.

If possible, no single customer should account for more than 10% of annual sales. One account at 25% or 40% is a deal killer for many buyers and lenders. It doesn’t mean that the business isn’t sellable.  It’s still sellable.  We had a large distribution business who’s largest customer was 90% of the sales.  Buyers still wanted it, however the buyer’s wanted massive concessions from the seller including earnings, performance metrics and seller financing to do the deal.  Even if that customer has been loyal for years, the buyer sees a contract that can leave. Diversifying revenue is one of the highest-ROI things one can do before a sale.

A team, even a partial one.

A complete management team is rare in owner-operated companies, especially in the main street lower end of the spectrum. Buyers should know that, but they keep searching for businesses with full management teams in place. Ultimately, what gives buyers more comfort is evidence that the owner is not the only person who can run the place. A bookkeeper, lead salesperson, lead estimator, field manager, part-time CFO, and a president or general manager is an ideal structure. Even two or three of those roles change the valuation conversation. Any org chart that shows decisions, customer relationships, and operations living with more than one person is valuable.

Licenses that do not walk out the door with you.

If the business needs a contractor license, professional license, or other credential to operate, do not wait until listing day to figure that out the transition for a buyer. Hire or develop an employee who holds the license and, where the rules allow, get the company licensed under that person. Buyers will pay more for a company they can legally operate on day one. They will pay less, or walk away, if the license belongs to the seller and can go with the seller.

Those are not nice-to-haves. They are the difference between a good offer and a great offer.

The 5-Year Plan

Year 1: Get Honest About What You Have

Start with a seller-style audit, not a sales pitch to yourself.

Pull three to five years of tax returns, year-end financials, and a current trailing-twelve-month P&L and balance sheet. Look at them the way a buyer will. Identify:

• How much of the “profit” is really add-backs
• Which expenses are personal or poorly coded
• Which customers make up more than 10% of sales
• Which functions only the owner can perform
• Whether the license for the business sits with owner or the company

Open a conversation with your CPA about reporting, not just tax minimization. The goal for the next five years is a company that shows real earnings on the tax returns, with clean categories and fewer lifestyle deductions.

Document the current team, even if the team is you plus one person. Write down who does sales, estimating, field work, billing, and vendor relationships. That list becomes the hiring plan.

Year 2: Clean the Financials and Start Transferring Knowledge

This is the year you make the books look like a business, not a checkbook.

Rebuild the chart of accounts so sales are categorized and expenses are itemized. Stop lumping revenue. Stop burying personal costs in the business. If you do not have a bookkeeper who can produce monthly financials on time, hire one or upgrade the one you have. A competent bookkeeper is one of the cheapest value-adds in a future sale.

Begin reducing owner-only knowledge. Write simple processes for estimating, job costing, collections, purchasing, and customer intake. You do not need a 200-page manual. You need enough documentation that a buyer believes the company can run without you standing in every doorway.

If a license is required, start recruiting or promoting the person who can carry it. Licensing and insurance changes take time. Do not leave this for the last year.

Year 3: Build the Team and Break Customer Concentration

By year three, the financials should already be cleaner. Now work on transferability.

Hire or promote into the roles buyers care about: bookkeeper, lead salesperson, lead estimator, field manager, and someone who can act as president or GM. You may not fill every seat. Fill the ones that currently collapse if you take a two-week vacation.

Start shifting customer relationships off your personal cell phone. Introduce the lead salesperson or account manager. Put contracts, warranties, and communications in the company name and company systems.

If one customer is over 10% of sales, make diversification a management objective, not a hope. Add adjacent services, new customer types, or new geographies. A buyer will ask for a customer concentration report. You want that report to reflect that no one customer could shut down the business if that customer left the next day.

Keep taxable profit visible. Resist the urge to “zero out” the company each year. A buyer would rather see $400,000 of real profit on the return than $150,000 plus a stack of personal expenses you swear are add-backs like the large pickup truck with huge whiles that only the owner drives.

Year 4: Make Performance Look Repeatable

Buyers buy trends. Use this year to make the trend obvious.

Hold pricing discipline. Protect margins. Do not take sloppy work just to pump revenue before a sale. A slightly smaller company with consistent profit is easier to sell than a larger one with wild swings.

Tighten contracts, job files, equipment lists, employee files, and vendor agreements. Incomplete records create diligence delays, and delays create price chips.

If the team is in place, begin stepping back from daily decisions on purpose. Let the field manager run the field. Let the estimator own the bid calendar. Let the bookkeeper close the month without you rewriting the entries. The company should start looking like it has a management structure, not a founder with helpers.

This is also the year to talk confidentially with a broker about valuation range, likely buyer types, and what still needs work. That conversation is cheaper and more useful two years out than two months out.

Year 5: Polish, Do Not Panic

The last year is for finishing, not reinventing.

Keep the books current every month. Have tax returns filed on time. Prepare a clean trailing-twelve-month P&L, sales-by-category reports, customer concentration reports, and an org chart that shows who does what.

Normalize only the add-backs that are real and defensible: owner salary above replacement cost, one-time legal fees, personal auto, and similar items. If you have spent four years reducing the junk, this list should be short. That is the point.

If the license strategy is not finished, finish it now. A buyer’s attorney and lender will ask who holds the license and what happens at closing. You want a clear answer.

Then go to market with a company that already looks like an acquisition, not a rescue project.

How does all this affect the value of the business?

Buyers pay for transferable cash flow with minimal risk. Every item above that we recommend needs fixing could reduce buyer’s a reason to offer a lower price.

Clean, categorized financials speed up diligence and support a higher multiple. Profits that show up on the tax returns give lenders and buyers confidence. Low customer concentration reduces perceived risk. A partial management team answers the question every buyer asks: “What happens if the owner leaves?” A license that stays with the company removes a closing condition that kills deals.

None of this requires you to become a Fortune 500 company. It requires five years of ordinary professional habits.

The Mistake We See Most Often

Owners wait until they are tired, then try to sell the business as it exists today. They have good customers, good equipment, and a good reputation. They also have owner-centric operations, lumped sales, thin taxable income, and one customer that is too big. The business is real, but then again so are these other issues.

The owners who do this work early sell faster and they sell from a position of strength. They can say no to a low offer because the company is ready for the next buyer.

Five years sounds like a long time, but time flies. In a closely held business, it goes quickly. The work you do this year is the package a buyer will review in five years.

If you are two to five years from a business sale and want an assessment of what buyers will like and pay you more money for, call us.  It is a conversation worth having before you need it.

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