Seller preparation: costs, choices and current rules

By the time a business reaches the market, most of its price is already decided. Not because a buyer has decided anything, but because the things buyers pay for — earnings that are legible, revenue that does not hang on one person or one account, work that happens whether or not the owner is in the building — take a year of ordinary trading to establish. You cannot manufacture them during a sale. You can only present what is already there.

That is the whole argument for preparing early. The year before a sale is when the value is decided; the sale itself only reveals it.

What the buyer is actually buying

Not your assets. Not last year's revenue. A buyer is paying for a stream of earnings that continues after you leave, and for confidence that it will.

Everything below follows from that one sentence. The gap between this business made money last year and this business will make money next year without its owner is where sellers lose the most money, and it is the gap preparation is meant to close.

A year out: the things only time can fix

Four areas, in rough order of how much they move the price. None of them can be dealt with once a buyer is watching.

Clean books beat explained books

Running personal spending through the company is the most common thing a first-time seller has to unwind. Buyers are not offended by it. The problem is arithmetic: every private expense you want counted back into earnings becomes an add-back, and every add-back is a line you have to prove. An add-back you can document is a negotiation. An add-back you cannot document is a discount.

A clean trading year — where the profit and loss statement is one you would hand to a stranger without commentary — is worth more than a messy year plus a good story. Aim for management accounts, bank records and tax filings that reconcile to each other. Where they do not, the buyer's accountant will find the gap and will assume the least flattering explanation for it.

If you are unsure how normalised earnings will be presented, read how the main valuation approaches differ before you start rearranging anything.

Reduce what depends on you

Write down every decision in a normal week that only you can make. Pricing exceptions. Hiring. The relationship with the one supplier who gives you terms. The call the largest customer makes when something goes wrong.

Each item on that list is a reason the buyer needs you after closing, and therefore a reason to hold back part of the price until the business has proved it survives your departure. Hand those decisions over one at a time, to named people, far enough ahead that the handover is visible in the record rather than promised in a meeting.

Deal with concentration honestly

Concentration is any single point of failure in the revenue: one customer who is a large share of sales, one supplier with no realistic alternative, one referral channel, one platform, one contract.

You often cannot remove it in a year. You can change its shape. A written agreement instead of a long-standing understanding. A renewal that runs past the likely closing date rather than expiring in the middle of diligence. A second account deliberately grown.

What you should not do is hide it. A buyer who discovers concentration in diligence reprices the deal and starts wondering what else is buried. A buyer told about it in the first meeting prices it in and carries on.

Get the knowledge out of people's heads

Undocumented process is not a filing problem. A business is worth what a competent stranger can operate. If the way work actually gets done lives in three long-serving employees and your own memory, the buyer is being asked to purchase three people and a memory.

Written procedures for the things that go wrong, a sales process that exists outside one person's inbox, supplier terms recorded somewhere other than a phone, customer history in a system rather than an email account — none of this is glamorous, and all of it converts directly into the buyer's confidence that earnings continue.

Six months out: assembling the record

Sooner or later a buyer will ask for the file. Building it early costs you nothing and buys two advantages.

The obvious material: financial statements covering enough years to show a direction rather than one good result; tax filings; a customer list by revenue; supplier terms; employment contracts and who is on them; leases; licences and permits; any dispute, past or live; every loan, lease obligation and personal guarantee; the asset register with what is actually still in use.

The first advantage is speed. How quickly a seller answers a diligence question is itself information. Fast, complete, consistent answers describe a business under control. Slow answers that arrive in pieces describe something else, whatever the numbers say.

The second is that you find your own problems first. Assume everything a buyer's accountant would find will be found. Locate it now, decide how you will explain it, and adjust your own expectations before you are defending a price. For what that review actually looks for, see the guide to diligence.

Find out who has to say yes

Before you talk to anyone, establish who besides you must consent to a sale. A landlord may control assignment of the lease. A franchise or distribution agreement may control change of ownership. A major customer contract may contain a change-of-control clause. A lender may have to be repaid or may have to approve. A licence may not transfer with the entity at all.

These are contract and regulatory questions with real answers, and they are answers your lawyer can get in weeks. Discovering one of them late is how completed deals fall apart.

The last stretch before going to market

Do not reshape the business to flatter the numbers. Deferred maintenance, a hiring freeze, pulling invoices into the period, letting marketing lapse — a competent diligence process is built to find precisely this, and being caught at it costs more than the numbers gained.

Decide what you want besides price. How long you are willing to stay after closing. Whether continuity for staff matters to you. Whether you would finance part of the price yourself. Whether you are prepared for a direct competitor to read your customer file under a confidentiality agreement. These preferences shape which buyers you should even talk to, and they are much harder to form once a real offer is on the table.

Put your advisers in place before the first conversation rather than after a buyer appears. A transaction of this size warrants a broker, an accountant and a lawyer who have done this before; the broker's role and its limits is worth understanding before you sign anything with one.

What preparation cannot fix

Be honest with yourself about the limits.

• A business in a structurally declining market prepares well and still sells into that market.
• Earnings that rest on a contract with a known end date are worth what the remaining term is worth, not what the run rate suggests.
• A licence, lease or key agreement that cannot be transferred is a constraint on the deal structure, not a presentation problem.
• Your own deadline. A seller who must complete by a particular date has given up the ability to walk away, and experienced buyers can tell. If you can afford to spend a year preparing, you can afford to spend it not selling.

Costs, and what to ask about them

Selling costs money, and the seller pays most of it: advisory fees, legal work, accounting support, and often an independent review of earnings that the buyer relies on. The amounts vary enormously by size and complexity, and anyone quoting you a standard figure without seeing your business is guessing.

What you can do is insist on clarity. Ask each adviser, in writing: what is the fee, what triggers it, what is payable if the deal does not complete, what is billed separately, and for how long after the engagement ends can a fee still be claimed. Read the answers before you sign, not after a buyer appears.

For general orientation on the process of winding up or transferring a business in the United States, the Small Business Administration publishes a guide to closing or selling a business. Treat it as a map, not as advice about your situation.

Five questions before you start

• If you disappeared for three months, what would break first?
• Which single customer, supplier or employee could most damage the business by leaving?
• Could a stranger reconstruct last year's profit from the records you keep, without asking you anything?
• Who, other than you, must consent to a change of ownership?
• What would you accept besides the highest price, and what would you refuse at any price?

If the answers are uncomfortable, that is useful. You still have time to change them.