Why preparation pays, and why it has to start early
Two businesses with identical earnings can sell for very different amounts. The difference is rarely the industry or even the growth rate. It is how much risk the buyer believes they are taking on, and almost every element of that risk is something the owner could have addressed — given enough time.
The problem is timing. An owner who decides to sell in January and lists in March has three months to fix problems that took a decade to create. Customer concentration cannot be diversified in a quarter. A management layer cannot be hired and proven in a quarter. Three years of clean financials cannot be produced retroactively without raising exactly the questions you were trying to avoid.
Everything that moves the price meaningfully takes twelve to twenty-four months to change. Everything you can change in ninety days moves it very little.
That asymmetry is the entire argument for starting early. The work below is not complicated. It is simply slow, and it competes with running the business, which is why it gets deferred until it is too late to matter.
Clean financials, and what “clean” actually means
Buyers do not expect audited statements from a small business. They expect consistency: the same accounting treatment applied the same way across three years, so the trend they are looking at is real rather than an artefact of how things were booked.
The most common problem is not fraud or error. It is that the business has been run for tax minimisation, which is entirely rational right up until you sell. Every dollar of profit suppressed to reduce tax is a dollar the buyer cannot see, and at a four times multiple it costs four dollars of price.
Add-backs, and why buyers remove most of them
An add-back restores an expense the buyer would not incur. Owner compensation above market, a personal vehicle, a one-off legal settlement. These are legitimate and they belong in the analysis. The problem is what happens in diligence: an add-back you can document survives, an add-back you assert does not.
- Survives diligence — owner salary above market, supported by a compensation study; a family member on payroll who does not work in the business; a one-time expense with an invoice attached.
- Usually removed — “marketing we won’t need”; travel that turns out to be customer-facing; a “one-off” legal cost that appears in all three years.
- Damages credibility — aggressive add-backs that get struck cause the buyer to re-examine everything else, including the ones that were fine.
Suppressing profit for three years before a sale can cost more than the tax it saved. At a 4x multiple, $50,000 of hidden annual profit is $200,000 of price against roughly $15,000 of annual tax saved. The arithmetic reverses about two years before you sell, which is another reason the decision has to be made early.
Owner dependence is the discount nobody names
Ask a buyer what worries them about a small business and the answer is usually some version of: what happens when the owner leaves? If the answer is that revenue leaves with them, the business is not really an asset. It is a job with inventory.
This shows up in price, but more often it shows up in structure. A heavily owner-dependent business still sells — it just sells with a longer earnout, a bigger seller note, and a transition period measured in years rather than months. The headline number may look fine. How much of it you actually collect is a different question.
What buyers test
- Relationships — do customers deal with the business, or with you? A buyer will ask to see whether anyone else has contact.
- Decisions — can anything meaningful happen while you are away for two weeks?
- Technical knowledge — is there work only you can do, and is it written down anywhere?
- Vendor terms — were the pricing and credit terms negotiated personally, and do they survive you?
The test is not whether the business runs without you today. It is whether you can demonstrate that it ran without you for a month, last year, and nothing broke.
Reducing dependence takes the longest of anything on this list, because it usually means hiring someone, paying them for a year or more, and living with lower earnings while they prove themselves. That cost is real. It is also almost always recovered in the multiple, and it is the single most common reason a deal gets restructured late.
Customer concentration, and where the thresholds sit
Concentration is straightforward to measure and difficult to fix, which is why it should be measured early. The rough thresholds buyers apply:
| Largest customer | How buyers read it | Effect |
|---|---|---|
| Under 10% | Diversified, no single point of failure | No adjustment |
| 10–20% | Worth understanding, not alarming | Minor |
| 20–35% | Material risk, contract terms scrutinised | Discount or holdback |
| Over 35% | The deal is partly a bet on that relationship | Earnout tied to retention |
Fixing concentration means growing the rest of the business faster than the large account, which takes time and often costs margin. What you can do more quickly is reduce the perceived risk: get the relationship documented in a contract with a reasonable term, make sure more than one person in the business has the relationship, and be able to show a multi-year history rather than a recent win.
Supplier concentration gets far less attention and can matter just as much. A single source for a critical input, on terms negotiated personally by the owner, is the same risk viewed from the other side of the business.
Documented operations beat impressive operations
A business that runs well because experienced people know what they are doing is worth less than an identical business where the same knowledge is written down. The first is a set of relationships; the second is a transferable asset.
This does not require a formal quality system. It requires that someone competent, arriving new, could find out how things are done. In practice that means the recurring processes — how an order moves through the business, how pricing is set, how a new employee is trained, what happens at month end — exist somewhere other than in the heads of the people who do them.
Where to start if you have nothing
- Have each person spend an hour writing down what they actually do in a week. Not a job description — the real sequence.
- Document the three processes where a mistake costs the most money.
- Write down anything currently known by exactly one person. That list is your risk register.
- Keep it somewhere a buyer could be shown without a week of preparation first.
Legal housekeeping, which is dull and stops deals
None of this affects what the business is worth. All of it affects whether the sale closes on schedule, and a delayed close is where deals lose momentum and buyers renegotiate.
- Corporate records — minutes, resolutions, share register and cap table current. Missing consents from years ago take weeks to reconstruct.
- Contract assignability — check whether your significant customer and supplier agreements survive a change of control. Some require consent, which means asking, which means telling them you are selling.
- Lease — a term expiring shortly after closing hands the landlord leverage over your buyer, and they will price that.
- Intellectual property — trademarks, domains and software registered to the entity rather than to you personally. This is a common and avoidable finding.
- Employment — key people under written agreements; classification of contractors defensible.
- Disclosure — known disputes and contingent liabilities surfaced early. Found in diligence, a small problem becomes a large one.
Every issue on this list is cheaper to fix before a buyer finds it. The cost is not the remedy — it is what the discovery does to trust. A buyer who finds one undisclosed problem assumes there are others, and prices accordingly.
A realistic timeline
Working backwards from a target close, the sequence looks roughly like this. The early items are the ones that actually move price, which is precisely why they cannot be compressed.
Reduce owner dependence
Hire or promote the person who will run operations. This needs a year of evidence behind it to count for anything.
Stop suppressing profit
The financial history a buyer sees starts now. Decide that the next three years are the ones being sold.
Address concentration
Grow the accounts that are not your largest. Get the large ones under contract with sensible terms.
Document operations
Processes written down, knowledge out of individual heads, a second person able to cover each critical role.
Legal housekeeping
Corporate records, IP assignment, lease term, contract review. Slow, unglamorous, and it stops closings.
Assemble the data room
Financials, contracts, leases, payroll, tax returns, insurance. Organised the way a buyer will ask for it.
Quality of earnings
Have the add-backs and normalisations prepared and supported before a buyer's accountant asks.
Go to market
With three clean years, a management layer, documented operations and no surprises waiting.
The checklist
Work through this before you speak to a buyer or a broker. Anything unticked is either something to fix or something to disclose — and deciding which, in advance, is the whole point.
If most of this is unticked and you intend to sell this year, the honest answer is that you are selling into a discount. That may still be the right decision — health, partnership changes and market timing are real reasons to move now. But it should be a choice you make knowingly, rather than something you discover during diligence.