Getting a company ready to sell: the 2 to 3 year checklist

1. Why 2 to 3 years

A buyer pays for 3 things you cannot produce in a hurry: numbers that prove themselves, a business that runs without you, and a structure that lets you keep what you are paid. Each takes years, not weeks. That is why the owners who get the best outcomes start 2 to 3 years before they want to leave, and why the Canadian Federation of Independent Business found that 76% of small business owners plan to exit within 10 years while only 9% have a formal written plan for it.

This guide is that plan, or the skeleton of one. It runs backwards from the sale: what to do 3 years out, 2 years out, 1 year out, and in the last 6 months, followed by the whole checklist in 1 place. It is built around the same 10 things the buyer readiness scorecard measures, so if you take the scorecard first, the 2 or 3 gaps it names are the items to start with.

2. The 10 things a buyer prices

10 things decide whether a private company is buyable, and at what discount. The scorecard weights them out of 100, and the 3 heaviest are the 3 that kill most sales.

1. Owner dependence. Whether the business runs for 90 days without you. 15 points.
2. Customer concentration. The share of revenue from your largest customer. 15 points.
3. Financial records. Whether the statements survive a look. 15 points.
4. Management depth. Whether someone else could run daily operations. 10 points.
5. Revenue you can see coming. How much of next year is already contracted or recurring. 10 points.
6. Revenue trend. The last 3 years, which are the only evidence a buyer has for the next 3. 10 points.
7. Real profitability. Profit after a market wage for the job you personally do. 10 points.
8. Agreements in writing. Customer and supplier relationships on paper. 5 points.
9. Single points of failure. A person, supplier or licence you could not quickly replace. 5 points.
10. Clean ownership. A share register with no open question in it. 5 points.

None of these is about price. The scorecard never returns a dollar figure, and neither does this guide. What the list does is tell you where a buyer will look, and the years give you time to have an answer ready. The guide to how a sale works explains what happens once they look.

3. 3 years out: the foundations

Take the scorecard, and write the result down. It takes 2 minutes and gives you a baseline and the 2 or 3 gaps costing you most. Take it again each year. The point is the trend.

Get the numbers onto a footing a buyer will accept. If your statements are prepared internally, move to year-ends prepared by an external accountant now, because a buyer will want 3 clean years and this is year 1 of them. Separate what the company spends from what you spend. Start a monthly management report, even a 1 page one, so that by the time you sell there is a habit of numbers a buyer can read.

See your accountant about the exemption. The lifetime capital gains exemption on a share sale has tests that run over the 24 months before the sale, and a company that has built up cash, investments or property inside the operating business usually fails them until those are moved out. Moving them cleanly can take up to 2 years, and if more than 1 family member is to use an exemption, the shares have to be in their hands well ahead. The guide to share sales and asset sales sets out the tests. This is the item with the longest lead time on the list, and the most expensive to leave.

Start handing over. Pick 1 decision you sign off on today and give it to someone else this quarter. Then another. By the time you sell, a buyer needs a year of evidence that the business does not stall without you, and that year has to be a real one.

4. 2 years out: the structure

Name the second in command. If nobody could run daily operations without you, this is the year to hire or promote the person who can, and to let them. A buyer who has to supply a manager on day 1 pays less for the company that needed one.

Work on concentration. If 1 customer is a quarter or more of revenue, growing the next 3 accounts moves the number faster than winning 1 more big one. Concentration is a share, so the denominator is the lever.

Put the relationships in writing. Paper the 5 largest customers and the 5 most important suppliers first. Convert the steadiest repeat customers onto a standing agreement, even at the same price, because the certainty is what a buyer is paying for.

Find the second source. For any supplier, person or licence you could not quickly replace, find the alternative now, even if you never use it. The point is being able to answer the question.

Tidy the corporate record. The minute book, the share register, the shareholders’ agreement if there is one, the intellectual property registered in the company’s name rather than yours, the leases signed by the right entity. A lawyer and an afternoon: the cheapest item on the list to fix and the most expensive to leave.

The second clean year-end. And the purification of the company’s assets, if the accountant said it was needed, under way. The scorecard again, to see what moved.

5. 1 year out: the proof

The third clean year-end. With the adjustments a buyer will make already visible: your own pay at a market rate, personal costs out of the company, anything that happened once labelled as such. A buyer normalizes the earnings anyway. It is better that the number they arrive at is the one you expected.

The manager runs it. This is the year the evidence is made. Take a real holiday, and let the numbers show that the business kept going.

Decide what kind of sale you want. A full sale, succession, a management buyout, a partial sale, a merger with a strategic buyer. They attract different buyers and use different advisors, and the guide to how a sale works lays out the 6.

Decide who should run it. The guide to brokers and M&A advisors is that choice, and the size of the company decides most of it.

Build the data room before there is a buyer. Contracts, leases, employment agreements, permits, insurance, the minute book, the last 3 years of statements and tax filings, gathered and indexed. Due diligence then becomes a download rather than a search, and the guide to how long a sale takes explains how many weeks that saves.

Retake the scorecard. The gaps that remain are the ones a buyer will price. Know them before the buyer does.

6. The last 6 months

Engage the advisor, and let them run the preparation and the materials while you run the company.

Run it as if you were keeping it. Buyers reprice on the latest numbers, and the most common way a deal loses value between the letter of intent and closing is a soft quarter in the middle. Keep marketing, keep maintaining, keep hiring where you would have hired.

Keep it quiet. Staff, customers and competitors learn about the sale when there is a signed deal and a plan for telling them, not before. Confidentiality is the reason a managed sale goes through an advisor rather than a listing.

Change nothing large. No new 10 year lease, no new line of business, no equipment bought on the assumption a buyer will want it. Each one becomes a question in diligence.

7. The checklist, in 1 place

3 years out.

• Take the scorecard and keep the result.
• First year-end prepared by an external accountant. Company and personal spending separated.
• A monthly management report, started.
• The accountant briefed on the exemption, the 24 month tests and the structure.
• The first decision handed to someone else.

2 years out.

• A named second in command, running daily operations.
• The next 3 accounts grown, so no customer is a quarter of revenue.
• The 5 largest customers and 5 key suppliers on written agreements.
• A second source for anything irreplaceable.
• Minute book, share register, intellectual property and leases in order.
• Second clean year-end. Purification under way if needed.

1 year out.

• Third clean year-end, with the normalizing adjustments visible.
• A year of the manager running it, with the numbers to show for it.
• The kind of sale decided, and the broker or advisor question answered.
• The data room built and indexed.
• The scorecard retaken, and the remaining gaps known.

The last 6 months.

• The advisor engaged.
• The company run as if you were keeping it.
• The sale kept confidential until there is a signed deal.
• Nothing large changed.

8. What not to do

• Starving the business to fatten the profit. Cutting marketing, maintenance or a hire in the year before a sale shows up in the trend, and a buyer reads the trend before the profit.
• Taking the first knock on the door. 1 buyer is not a market. An unsolicited offer is a reason to start the process, not to skip it.
• Fixing the record instead of the business. A tidy binder over an owner-dependent company is still an owner-dependent company.
• Leaving the tax to the end. The 24 months cannot be met in a hurry, and the exemption is usually the biggest single number in what a seller keeps.
• Telling people. It can only be done once.

9. Where we fit

Sell My Company is a finder, and proudly Canadian. Owners of Canadian companies with $1 million or more in revenue tell us 4 things, and we introduce them to 1 vetted Canadian M&A advisory firm that has closed deals at their size in their sector. 1 introduction, never a list, and free to you at every stage, because the advisory firm pays our fee.

We do not prepare your company, value it or run the sale. What we can do, at any point on this calendar, is make the introduction, because an advisor who sees a company 2 years out can tell an owner exactly which of these items will move the price. If you are years away, take the scorecard. If you are ready to talk, tell us 4 things.