Business exit planning, year by year.

Why exit planning works

By the time most owners decide to sell, the levers that move the multiple most have already locked in. Exit planning is the work of changing those levers before they matter.

The multiple a business commands at sale depends primarily on four factors: customer concentration, recurring revenue percentage, growth trend, and owner dependence. Each of these is largely set 12-24 months before a sale. Owners who optimize for these levers ahead of time routinely sell for 20-50 percent more than identical businesses run by owners who do not.

5 years out: define the exit and identify the levers

If you are 5 years from selling, the work is strategic. What kind of buyer? What kind of exit?

At the 5-year mark:

• Define exit goals. Full exit vs partial. Cash vs structured. Retirement vs second act.
• Identify likely buyer types. Strategic acquirer, financial buyer, individual operator, ESOP. Different buyers value different things.
• Baseline the business. Where does it stand on each of the four levers today?
• Begin management depth. The highest-leverage 5-year project. A capable number-two takes years to develop.
• Establish a clean financial baseline. Switch to accrual accounting if not already. Engage a quality bookkeeper.

3 years out: execute on the levers

The 3-year mark is where execution starts on the operational changes that move the multiple.

At the 3-year mark, work concentrates on the four multiple-moving levers:

• Customer concentration. Diversify the customer base. Reduce dependence on any single customer to under 15 percent. This is a multi-year project.
• Recurring revenue conversion. Where possible, convert project-based revenue to contract-based. Service agreements, maintenance contracts, subscription elements.
• Growth investment. The 3-year mark is when investments in sales capacity, marketing infrastructure, or new offerings need to start paying off.
• Owner-independence transition. Document processes. Move customer relationships to the team. Reduce owner-only knowledge.

1 year out: financial and legal cleanup

At 12 months out, the focus shifts to the documentation and presentation that buyers will scrutinize.

At the 12-month mark:

• Get a baseline valuation. Now you know what the business is worth and where the biggest gaps remain.
• Complete the financial recasting. Three years of clean, accrual-basis financials. Add-back schedule documented.
• Begin pre-sale tax planning. Asset vs stock implications, allocation strategy, charitable structures if relevant.
• Legal cleanup. Outstanding litigation, IP assignments, employment agreements, lease assignability.
• Operational documentation. Process documentation, key supplier and customer contracts reviewed.

6 months out: prepare to launch

The 6-month mark is when active preparation for going to market begins.

At 6 months out:

• Choose representation. Engage an M&A advisor or business broker. Allow 4-6 weeks of selection.
• Finalize the CIM. The confidential information memorandum is the document buyers see post-NDA. It deserves significant care.
• Build the data room. The data room is what buyers diligence in. Better to assemble it carefully than scramble during diligence.
• Mock diligence. Have your advisor run a mock diligence to identify issues before buyers do.

Levers that take more than a year to move

Some changes simply cannot be done in months.

• Customer concentration reduction. Adding diversified customers takes years.
• Recurring revenue conversion. Converting transactional customers to contracted customers requires service redesign and sales motion.
• Management depth. Hiring, training, and trusting a capable number-two takes 18-36 months.
• Growth establishment. Building a verified growth trend requires demonstrable performance over 24+ months.
• Margin improvement. Pricing, cost structure, mix shift — each takes time to implement and to show in the trailing financials.

Frequently asked questions