As a business owner, it’s critical to start preparing for the eventual sale of your business as far in advance as possible.
Business transition planning can help ensure that when the time comes, you’re ready to move forward with confidence.
In this post, I’ll walk through 21 strategies to position your business to be “exit ready” – so you can have options and maximize your sale value.
What is Business Transition Planning?
Business transition planning is the art and science of preparing for the eventual transfer of a business to prospective buyers.
The ultimate goal of business transition planning is to ensure a smooth and successful transition of the business to the new owners or leaders while minimizing disruption to operations, preserving the value of the business, and protecting the interests of stakeholders (i.e. employees, customers, and shareholders).
This involves a wide range of activities, including developing an exit strategy, identifying potential successors, valuing the business, and preparing the business for sale or transfer.
Business Transition Checklist
Let’s walk through 21 items you should think about in your business transition planning.
Remember that successful business sales don’t just happen, they need to be created.
By preparing your business for sale well in advance, you can identify and address any weaknesses, plan for succession, and exit from a position of strength.
It’s worth mentioning that many of these strategies will take some time to implement. For the best results, I recommend you start this process at least two years before you’d like to sell.
1. Find Potential Buyers
Even if you have no immediate intention of selling, it’s never too early to start identifying prospective buyers.
Most small business owners and entrepreneurs never take the time to do this, which is one contributing reason why 80 – 90% of businesses never sell.
I want you to put together a list of at least three to five prospective buyers and think through the reasons why they should acquire you.
Remember that this a volume game: to get the best price, you’ll want to cast out a wide net (think private equity firms, competitors, strategic buyers, etc.). More options gives you leverage and a higher likelihood of getting the price and terms you want.
A few things to think about:
- How do you want to position your business to these potential buyers?
- How will this positioning drive your strategy going forward?
- Can you come up with a tailored story for each potential buyer around the strategic fit and future upside potential?
2. Ensure Your Company Brand is Not Tied to Any Individual’s Name
Move branding away from any individual’s name to reduce risk of valuation damage due to your business being branded with the name of the founder or any individual’s name.
When a business is closely associated with the name of its founder or other individuals, the value of the business may be perceived as being closely tied to those individuals, which can make it harder to sell or transfer ownership.
By moving the branding away from any individual’s name and focusing on the overall value and reputation of the business, you can make it more appealing and help protect the value of your business.
3. Owner Not Critical in Day to Day Operations
When your business can run entirely without you, you have a valuable asset. One of the biggest mistakes business sellers make is to design a business that relies too heavily on them.
If you’re the rainmaker who makes your business successful, you’re in big trouble. Once you leave, potential acquirers will have major hesitations that the business can continue without coming to a screeching halt.
Here’s a test: you should be able to leave for six months (with no communication) and have the business run as usual. Nothing can be dependent on you or else will take a major hit on your potential sales price.
This does not happen overnight, but if you are heavily involved today, start delegating responsibilities as soon as possible. You can start with small tasks and gradually expand from there.
4. Retention and Succession Planning: Key Management and Top Employees
A succession plan ensures that there is a continuous pipeline of talent available to take over after you leave the company.
Buyers will want to see your current management team (and key employees) secured to continue to grow the business. Do all you can to prevent your skilled employees from leaving in the two years prior to your exit. Getting your high performers committed to staying onboard will go a long way.
Think about paying your top people above market and offering them a long-term incentive plan that rewards their performance and loyalty. If you’re not comfortable giving company stock, think about offering a “stay bonus” that provides members of your management team with a cash reward if you sell.
5. Reliable and Consistent KPIs
If you haven’t already, establish clear and measurable KPIs to track business performance. Think about core metrics and tracking you can create for the following:
• How do you drive traffic?
• How do you attract leads and build your prospect list?
• What is your conversion mechanism to drive sales?
• How do you ensure customers are happy?
• What is your systematic referral engine?
• How do you sell customers after the initial sale?
You should be able to show consistent, detailed metrics for each category (including who’s accountable), which will show that your success is predictable and will continue after the sale.
In an ideal world, I’d recommend benchmarking your performance in these metrics against industry averages. You want to be able to show you can outperform your peers in the industry.
6. Obsess over Accuracy of Financial Records
If you overemphasize any area before exiting, make it accounting. While it’s not overly exciting, this is the one area where you want to be absolutely perfect.
Your financial statements are the foundation that your business valuation is built on, so it’s important to get them right. This means having a complete and accurate picture of your tax records, cash flow, revenue, expenses, assets, and liabilities.
Make sure your financial statements are up to date, as buyers will typically be very interested in the last 12-36 months of data during financial due diligence.
7. Strong Financial Budgeting Process
A strong budgeting process (tracking actual results vs. projected) is another factor that can give you a lift when you sell.
Ideally you want to reduce the variability of financial performance over the course of multiple years. The lower the fluctuations between what you project and the actual results (fewer surprises), the more confidence buyers will have in the business’s ability to perform well in the future.
This increases your believability and provides more reason for buyers to trust forward looking projections, which can increase your valuation.
8. Get Your Company’s Financials Audited
As a follow-up from the last item, it’s worth thinking about getting your financials audited prior to selling.
Getting your financial statements (balance sheet, income statement, and cashflow statement) audited by an independent third-party auditor can provide credibility and peace of mind.
If you can’t afford a full audit, I’d recommend at least getting your financials reviewed from a reputable accounting firm.
9. Prioritize Profit
Your valuation will be heavily influenced by profit, so in the handful of years leading up to your exit, this is an area you want to be hyper-focused on.
Simply put: you want your profit figures to be as high as possible in the years prior to the sale.
A few tips:
- Cut any expenses that are not essential
- Only invest in things that will directly impact profitability (try to reduce expenses and not spend money on things that won’t increase profits)
- Don’t suppress profits to save on taxes (prioritize profit over maxing deductions)
- Don’t pay debt any fast than you need to and instead invest in things that will increase profits (i.e. ad spend)
10. Eliminate Single Channel Dependence
If you currently only rely on one marketing channel to acquire customers, this is a potential deal killer.
The most dangerous number in any business is one. If this single marketing channel stops working, it could cripple you. As an example, if 95% of your revenue is generated from Google Ads, this is something you want to address immediately. A slight change in their ranking algorithm could have a disastrous effect on your business overnight.
Try to eliminate any dependencies your business has on third parties and look to expand to other marketing channels (i.e. outbound sales calls, direct mail). Ideally, you want to prove you have multiple acquisition channels consistently bringing in customers.
11. Find Ways to Create Recurring Revenue
Recurring revenue is the holy grail of business valuation. A recurring revenue model is one in which customers make regular, ongoing payments for access to your product or service, and can increase your valuation multiple by 8X.
If you can develop a stream of recurring revenue, you’ll be able to command a much higher price for your business. If you’re interested in a deeper dive, I have a post with 11 ways to create recurring revenue in your business.
The question to ask yourself: what in your business can you charge for in a recurring way?
A few ideas:
- Sell subscriptions to your product or service
- Offer maintenance or support contracts
- Add product / service certifications or licenses
- Offer extended warranties or maintenance plans
- Add associations, buyers clubs, or membership programs
- Provide financing, payment plans, and leasing options
12. Thorough Documentation, Systems, and Standard Operating Procedures
As a business owner, you want to make sure your company is running as efficiently and effectively as possible. This means having detailed documentation of all processes and procedures so that anyone can pick up where you left off.
Aim to have your team capture every task they do consistently (exactly what to do at every step).
You want to have extreme detail into how every workflow happens to remove any sort of key person dependency risk.
13. Specialize and Productize
If you want to stand out, you can’t be all things to all people. If you instead focus on doing one thing incredibly well, you’ll be able to differentiate yourself from your competitors, position yourself as an authority, and command higher prices.
As John Warrillow says in Built to Sell, aim to make what you do “teachable, valuable, and repeatable”.
By specializing, can become the go-to company in your field, which makes it much easier to sell.
Think about how you can convert customized and unique services into reproducible and scalable product offerings. The more you can productize and automate things that once were bespoke, the more sellable your business becomes.
14. Develop a Compelling Growth Story
It’s critical to have a strong growth story around what the future growth opportunities are after the sale. Put together a multi-year scaling plan that paints a picture for what’s possible.
- What headroom is available?
- What is the untapped total addressable market?
- How could the business get there?
- What sales channels or growth strategies haven’t been tapped into yet?
Your buyer isn’t buying your business for what it is today, they are buying it for what it could be in the future. You want to be able to articulate strategies around how you could potentially 10X the business.
Remember that crafting a story that appeals to emotion is far more powerful than just numbers on a page. The more believable your story is, the more valuable your business will become.
15. Identify Where You Are Vulnerable: Reduce or Fully Eliminate Risks
When it comes to getting the full exit multiple you deserve, any risks present within your business can penalize you.
Figure out where you may be vulnerable to risks and take steps to reduce or fully eliminate them. Going through an internal due diligence process has a few advantages:
- Identify potential issues: you can address and fix problems before they penalize your sales price
- Maximize the speed of the sale: the more diligence you do in advance and provide to buyers, the quicker you’ll be able to close
- Increase credibility: sharing potential issues proactively goes a long way to give buyers confidence that there are no hidden red flags
Risks to keep an eye out for:
- Business complexity and poor systems: the potential for your business to be negatively impacted by inefficient or poorly designed systems and processes.
- Customer concentration: having a high dependence on a small number of customers for your business’s revenue. This can make your business vulnerable if one or more of these customers stop doing business with you.
- Market risk: the potential for market conditions to negatively impact your business.
- Legal or regulatory issues: potential legal or regulatory issues, or non-compliance with relevant laws and regulations.
- Cybersecurity: the potential for your business to be impacted by cyber threats such as data breaches, malware attacks, or other forms of cybercrime.
- Complex tax structures: the potential for your business to be negatively impacted by a complicated tax structure, which could make it difficult to accurately report and pay taxes.
- Single points of failure: the potential for your business to be negatively impacted by the failure of a critical system, process, or key person.
- Complex ownership/cap tables: complex ownership structures make it difficult to manage the company and determine who has control.
16. Reassess Business Structure
I recommend having your attorney review your business entity and all related documentation to ensure you choose the best entity type for your specific situation and goals. It’s worth getting this in order early on so you don’t have to scramble closer to your sale.
When making this selection, think about which offers the most flexibility for you in terms of tax considerations, ease of exit, control, and your financial goals.
Getting your business structure prepped to facilitate an exit can save you a lot of headaches later on.
17. Create Separate Entities for Value Areas
Think about setting up separate entities for your major areas of value – profit centers, tangible assets, and intangible assets (IP).
Setting up your business structure this way gives you a few advantages:
- Allows you to isolate and protect against liability: if one part of your business experiences a significant liability, the other parts will remain unscathed
- Gives you the ability to have multiple exits: a buyer can acquire the assets they want in a transaction, but also lets you keep certain profit centers to sell later.
- Keeping profit centers allows you to spin off new businesses (i.e., if you keep your media assets you could redirect these to create something new)
18. Settle Any Existing Lawsuits and Claims
Make sure that all outstanding legal matters are settled far in advance of any negotiations to sell your business.
If you have anyone filing lawsuits against you before you sell, your sales price could be significantly reduced. A buyer will estimate the potential damages of that lawsuit and ding you by that amount on the valuation.
19. Ensure All Intellectual Property (IP) is Registered
Often times, businesses have developed unique IP that’s vital to their operations. This could be anything from unique patents, trademarks, copyrights, customer lists, to trade secrets.
Make sure these are registered to help protect you in the event of a sale. When you register the IP, you also get additional statutory rights that can be enforced in court in the event of any infringement.
This will also make you more attractive to buyers who want certainty that they won’t be infringing on any existing IP rights when buying your business. This also gives you more leverage when negotiating purchase price and other terms.
I recommend taking the time to conduct a thorough IP audit, which involves reviewing all aspects of your company’s IP. The goal is to identify any potential gaps or areas where your IP protection can be strengthened.
20. Get a Business Valuation
If you are getting close to a sale, I’d recommend getting a professional business valuation for a few reasons:
- Helps you determine the true value of your business: will help you set a realistic asking price for your business and avoid undervaluing or overvaluing it.
- Helps you negotiate effectively: with a clear understanding of your business’s fair market value, you can negotiate more effectively with prospective acquirers. You’ll be better equipped to defend your asking price and make informed decisions about offers that come your way.
- Helps you identify areas for improvement: a business valuation can help you gauge the health of your business and identify weak spots to focus on.
21. Don’t Tell Anyone You’re Selling
Lastly, make sure you keep the sale of your business confidential. Don’t announce that you are selling until a deal is done and all parties have signed off on it.
Don’t tell any employee, family member, or close friend unless you absolutely need to. The last thing you need are rumors of a potential sale impacting customer relationships and employee morale.
Conclusion
As we covered, there are a handful of major steps you can take to boost your value and set you up for a successful sale.
Business transition planning is a complex process that requires careful planning, execution, and ongoing management.
Many business owners don’t take the time to put together a detailed plan, and it often costs them severely. By following these steps, you’ll be well-prepared for the sale of your business and more likely to achieve a successful outcome.
This is part of a series I’ve created on how to successfully sell a business – you might find the below posts helpful:
• M&A Advisors: How to Assemble a Top M&A Team
• Business Exit Planning: 16 Ways to Prepare Your Business for Sale
• Selling a Business Checklist: 32 Tips to Sell For Top Dollar
• How to Sell a Small Business Without a Broker (Bypass M&A Brokers)
• Tax on Selling a Business: 13 Easy Tips to Reduce Your Tax Obligations
• Rollover Equity M&A: Hidden Gem of Selling Your Business (11 Tips)
• Seller Notes: Exactly What You Need to Know Before Selling
• Add Backs: Everything You Need to Know When Selling (6 FAQs)
• Selling Business to Employees? Don’t Miss These 4 Critical Things
• LOI vs. IOI: Everything You Need to Know (11 FAQs)
• Distressed Business Sales: 9 Steps to Prep a Struggling Business for Sale
