Preparing a business for sale: the three-year plan

The best time to prepare a business for sale is three years before the listing, because the changes worth the most take that long to show up in the numbers a buyer will see. Reported small-business sales average about 2.58 times SDE. Moving a company from a 2.2 to a 2.9 on the same earnings is worth more than most owners' last two years of profit — and unlike profit, it compounds with every dollar of earnings.

Why three years

Buyers and their lenders look at three years of financial statements, sometimes five. A change made this quarter appears in one year of statements at the next annual close, in two years the year after, and only becomes "the track record" in year three. Start later and the improvements are real but invisible: the buyer sees one good year and discounts it as a seller dressing the window, which, started late, is what it is.

Slowest and most valuable: reduce owner dependence

Owner dependence caps more multiples than any other factor, and it is the slowest to fix. Moving customer relationships to a manager, writing down the processes that live in your head, and proving the business runs without you takes two to three years of deliberate delegation, because the proof is a track record, not a memo. The test a buyer applies is whether you can be gone for a month without revenue noticing. Start this one first. It is also the change that most improves the business you keep, if you end up not selling.

Slow: customer concentration and the earnings trend

If one customer exceeds a quarter of revenue, every offer will carry an earnout or a holdback priced against that risk. Diluting concentration means growing other accounts, and that takes 18 months to three years depending on your sales cycle. The earnings trend is on the same clock by definition: three years of flat or rising recast earnings is the asset, and each clean year you bank is a year of it built. Both of these are scored directly in theseven value driversthat produce the multiple.

Medium: clean up the books

A year or two before listing, stop running personal expenses through the company. Yes, each item is a legitimate add-back with documentation, and the recasting process exists to handle them. But every add-back is a negotiation, and a lender financing the deal underwrites the tax returns, not the recast schedule. Earnings that need no explanation are worth more per dollar than earnings that need a footnote. While you are at it, move to accountant-reviewed statements if you can; the credibility is cheap relative to what it protects. Seerecasting, explained for what buyers will scrutinize.

Fast: contracts, leases, and paper

Some fixes take a quarter, not a year. Get customer arrangements onto written contracts where the relationship supports it. Renegotiate the lease so a buyer inherits real term — five years with options beats month-to-month by a wide margin in any financed deal, since the lender wants the location to outlast the loan. Register the trademarks, paper the employee agreements, resolve the small litigation. None of these moves the multiple much on its own; together they remove the diligence snags that kill deals at the closing table.

Value the business now, not at the end

A baseline valuation at the start of the three years turns preparation from a vague intention into a scoreboard. Score the seven drivers, see which ones cap your multiple, fix those, and re-run the valuation annually. Owners who do this sell a different company than the one they started with.

What not to bother with

Skip the cosmetic spend: the logo refresh, the lobby furniture, the website nobody visits. Buyers of small companies price earnings, risk, and transferability, in that order. A dollar spent must either raise recast earnings or lower a risk a buyer can name. Everything else is decorating a house by repainting the mailbox.