Exit Planning: Preparing Your Business to Sell (Even If You're Not Ready Yet)

Why You Should Plan Your Exit Now

Here's a stat that should get your attention: according to the SBA, roughly 50% of small businesses survive past the five-year mark. Of those that make it, a significant number simply close when the owner retires because there was no exit plan. All that value, all those years of work, just evaporates.

Exit planning isn't about leaving tomorrow. It's about building a business that's worth something to someone else, which, not coincidentally, also makes it a better business to run today.

The Three Ways Owners Exit

Sell to a Third Party

This is what most people imagine. An outside buyer purchases the business. This could be a competitor, a private equity firm, a larger company doing roll-ups, or an individual buyer looking to own a business.

Transfer to Family or Employees

Passing the business to a child, a partner, or a key employee. This can work beautifully, but it requires years of preparation and a realistic assessment of whether the successor can actually run the business.

Wind Down and Close

Sometimes the business is too dependent on the owner to transfer. In that case, the exit is about extracting maximum value over a planned timeframe and closing cleanly.

Each path requires different preparation. You need to decide which one you're working toward.

What Makes a Business Sellable

Buyers look at five things:

1. Financial Performance

Clean financials are non-negotiable. That means:

• Three years of tax returns showing consistent or growing revenue
• Clear separation between business and personal expenses
• Accurate books managed by a professional (not a shoebox of receipts)
• Healthy margins compared to industry benchmarks

2. Owner Independence

If the business falls apart when you take a two-week vacation, it's not sellable. Buyers want to see systems, processes, and a team that operates without the owner being involved in every decision.

This is the single biggest obstacle for most small businesses. If you are the business, there's nothing for someone else to buy.

3. Customer Diversification

If one customer represents 30%+ of revenue, that's a risk buyers will discount heavily. No buyer wants to pay full price for a business that crumbles if one client leaves. Work toward no single customer exceeding 10-15% of total revenue.

4. Recurring or Predictable Revenue

Businesses with service contracts, maintenance agreements, or recurring customers are worth more than businesses that start every month from zero. If you can show predictable revenue streams, your valuation goes up significantly.

5. Growth Potential

Buyers pay for the future, not just the past. Can the business grow with more marketing? More territory? More services? The opportunity needs to be clear and credible.

Valuation Basics

Small businesses typically sell for a multiple of their Seller's Discretionary Earnings (SDE), which is net income plus owner's salary plus owner benefits plus non-recurring expenses.

Most small service businesses sell for 2-4x SDE. Businesses with strong brands, recurring revenue, and owner independence can command higher multiples. Businesses that are essentially a job for the owner sell for less, if they sell at all.

Get a professional valuation done every few years. It shows you where you stand and what to improve.

The 3-5 Year Preparation Window

Exit planning should start at least 3-5 years before your target exit date:

Years 3-5 out:

• Clean up financials and separate personal expenses
• Begin documenting all processes and systems
• Identify and develop a second-in-command
• Diversify your customer base
• Address any deferred maintenance or legal issues

Years 1-2 out:

• Get a formal business valuation
• Assemble your advisory team (accountant, attorney, business broker)
• Optimize the business for cash flow and profitability
• Begin reducing owner involvement in daily operations
• Prepare a confidential business summary for potential buyers

Final year:

• Engage a business broker or M&A advisor
• Screen and qualify potential buyers
• Negotiate terms (price, structure, transition period)
• Execute due diligence and close

Tax Implications

The structure of your sale matters enormously for taxes. An asset sale vs. a stock sale can mean six-figure differences in your tax bill. Work with a tax advisor who specializes in business transactions. The SBA has resources on understanding the financial and tax implications of selling.

Don't wait until you have a buyer at the table to think about tax strategy. The best structures require planning years in advance.

Start Today

Even if you're 15 years from retirement, start building a business that could survive without you. Hire people who can make decisions. Document how things work. Diversify your revenue. Clean up your books.

The business you build for a future buyer is the same business that gives you freedom today. That's not a coincidence.