Whether you are just starting to think about exit planning or have a firm timeline in mind, there are critical areas of your business to examine before you exit. To achieve the highest possible valuation, and ensure a smooth sale process, it's essential to understand what is important to buyers. Read on to learn about several key value drivers as you prepare your business for a sale.

Institutionalize your knowledge. For sellers planning to retire or transition out of the business entirely after a sale, it’s crucial to offload day-to-day responsibilities, transition customer relationships, and document processes dependent on you. A business that relies solely on the owner to run effectively is less attractive to buyers than one where responsibilities have been delegated. Not all employees need to be aware of the ownership transition at this point, but it is important to develop a contingency plan involving key management to ensure the business is transferable after your exit.

Action item: Document processes and standard operating procedures.

Focus on profitability. While increasing revenue is important, profit margin plays an even more critical role in business valuation. Buyers will closely examine your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to gauge profitability. In many cases, the valuation will be calculated as a multiple of your EBITDA. It is a commonly accepted, market-defined proxy for cash flow, and cash flow is what buyers are most interested in.

Action item: Add recurring profitable revenue to your business. Focus on margin.

Customer diversification. Potential buyers view large revenue concentration (20% to 25% or higher) as a red flag. To mitigate this risk, business owners should actively diversify their customer base so that no single customer generates more than 5% to 10% of revenue. Showing loyal customers with long-term contracts can address some of the concern around customer concentration.

Action item: Evaluate whether your company revenue relies heavily on a single customer.

Clean up your books. Preparing your financials is a time-consuming yet critical step in the sale process, because any serious buyer will request to review them early in the process. In addition to having well-organized financials, you should make sure that financial records are prepared according to generally accepted accounting principles (GAAP). This is also the time to ensure personal expenses are separated from business expenses. While information requests vary based on the buyer, there are certain materials that will almost always be required, for example at least three years of income statements and balance sheets.

Action item: if your financial statements aren’t being maintained on a current, detailed, and accurate basis, address the problem immediately.

Keep going, but not alone. As you approach one of the biggest events in your lifetime as a business owner—the sale—it’s not yet time to take your foot off the gas. But remember, you don’t have to go it alone. An experienced mergers and acquisitions attorney can focus on the details of the sale so you can continue to run your business successfully. Maintain your efforts to optimize business performance and continue driving value, and your efforts will pay off.

Action item: Hire an experienced mergers and acquisitions attorney.

If you are a business owner considering private equity as an exit strategy, get in touch with us for a conversation about your goals, your business, and how our approach may be a good option for you.