When should an owner start thinking about selling their business? Some will be surprised by the answer.

An owner should start thinking about their exit strategy from day one.

Why?

An exit strategy will influence how you run your business. It will impact day-to-day decisions because you’ll make those decisions with a future sale in mind. If you haven’t started considering an exit strategy, now is the time.

But thinking and planning are two different things. If you think the horizon for selling your business is in, say, 15-20 years when you hope to retire, you may not need to start planning your exit quite yet. If, however, you’re thinking about selling in 5-10 years, no matter the reason, you should be planning for that exit right now.

Start Planning Your Exit

You read that right. If you’re thinking about selling your business in 5-10 years, you need to start planning for it right now.

Why? Because the right time to sell might not be the same as the time you want to sell.

You need to be prepared to entertain offers earlier (or later) than you originally intended.

Reality is dynamic. Exit opportunities may not crop up according to your timeline. You may be ready to sell, but a down market makes it a horrible time. Or maybe next month will present the perfect buyer, but you don’t have everything ready.

Your personal life could change due to family or health. Global circumstances shift constantly, and they affect the marketplace. What if an acquisition, merger, or employee buyout presents itself? Will you be ready?

Having a Pre-Exit Checklist will help you honestly evaluate your business as it is right now and how attractive it would if a buyer showed up on your doorstep tomorrow.

The Value of a Pre-Exit Checklist

It’s all about perception.

Maybe you’ve spent years of hard work building your business. There were lean times, times you didn’t think the business would make it. You invested in developing business processes and customer relations. You cultivated a fantastic team. You’ve poured a lot into make the business run.

From your perspective, the business — forged in your blood, sweat, and tears — is worth a lot.

But a potential buyer takes another perspective. They don’t see the years of investment; they see numbers and projections.

A Pre-Exit Checklist is valuable because it forces you to look at your business from a more neutral point of view. It helps you consider the aspects of your business a buyer will measure when deciding whether or not to risk the money, time, and effort purchasing your business will require.

The Pre-Exit Checklist I’ve included below will help you measure 10 major factors that potential buyers will find important. Each of these factors falls into one of the three categories I talked about in a previous post on exit strategy (future earnings, transferability, and operability) or into a bonus category I’ve added for this particular checklist (vision).

You don’t need a perfect score on every point to be in a good position to sell. But the more attractive you can make your business in each category, the better you’ll be able to move the conversation forward to eventually get the deal you’re looking for.

Let’s take an in-depth look, category by category, and I’ll include the checklist itself at the end.

Future Earnings

This is likely the first thing a potential buyer will look at. Put yourself in their place. You’d want to know right out of the gate how difficult it’s going to be to make a profit. Profit is the primary goal of a business.

To start assessing future earnings, consider the following three factors.

1. Diverse Customer Base

How diverse is your customer base? Does your largest customer bring in less than 20% of your revenue? Does 60% of your revenue come in from more than one industry? Diversity is good.

If you have a diverse customer base, it will assure a buyer that your business has the capacity to roll with the punches in an ever-changing marketplace.

2. Sustainable Revenue Stream

Is your revenue stream sustainable? Can you predict your next twelve months of revenue with reasonable accuracy? Do your customers buy from you on a recurring basis (repeat business)?

I know what you’re thinking, but some portion of your revenue is predictable.

3. Distinct Value Proposition

Do you have a distinct value proposition that you can easily articulate? Can you charge more than your competitors because of this advantage?

Quality, quantity, and location can be important value drivers.

If you’re unable to come up with a clear answer to some of these questions, it’s not the end of the world. Maybe you do great work and get great reviews, but you can’t honestly say you have a distinct value proposition. The entire point of this exercise is to be honest in your assessment.

The only right answer is the honest answer.

Transferability

A buyer will want to know how easily your business can change owners, a vital consideration when purchasing a business.

Again, the idea is to assess your business from a neutral position as much as possible. This will help you communicate the value of your business to a potential buyer in language they understand and help you make an honest assessment should there be an offer.

4. GAAP Compliance

Does a third-party accountant audit your financials? That may not be an appropriate question in your situation. If not, are your financials GAAP compliant?

5. Financial Decision Making

Does reviewing your financials help you make better business decisions? Finances are the lifeblood of a business. If you can articulate how you use financials to sustain and grow your business, the potential buyer can better visualize how they might want to operate it.

6. Owner Independence

Can your business run without you? If you take a vacation, for example, will you have to close down operations until you get back? The answer to this question lets a buyer know whether they’re getting a viable business with high value and low future earnings risk, or an irreplaceable individual they’ll have to rely on.

If the financials are in order and you have used them to make sound business decisions, the buyer will feel comfortable that the business will transfer without a lot of hassle. If the business is set up so that it can run without you on board, it will reduce the buyer’s risk and increase the potential value of future earnings.

Operability

A business set up to operate in a fluctuating marketplace is worth more than one that isn’t.

7. Scalability

Is your business scalable? In other words, when you do more business, do you make more money? This is an important question. If a business receives more work but doesn’t make more profit as a percentage of revenue, then something’s wrong.

8. Overhead

As a percentage of revenue, does your overhead decrease as your revenue increases? This is related to scalability in that it measures whether your business is built to take advantage of changes in the marketplace.

Potential buyers will look to see if there are established processes for operations and finances. Operability is a key factor in helping them to decide whether to make an offer.

Vision

And now for the bonus category (always overdeliver!). There are two factors to consider here.

9. Steerable Growth

If you’ve created an honest, believable growth story, the next question should be: Can you add valuable revenue if you choose to? As your business grows, is that growth steerable?

10. Employee Understanding

Can your employees explain to an outsider exactly how and why your business works? Do they understand your system of business? Do they consistently follow it?

These last two factors let a potential buyer see that the business will probably continue to run well and grow in the future. It bodes well if there is a plan in place to add more revenue and the current employees have the potential to continue on the road to growth.

All Together Now

Now that we’ve talked through each one, let’s take the points above and condense them into a nice, scannable checklist.

1. How diverse is your customer base?
2. Is your revenue stream sustainable?
3. Do you have a distinctive value proposition that you can easily articulate?
4. Are your financials GAAP-compliant?
5. Does reviewing your financials help you make better decisions?
6. Can your business run without you?
7. When you do more business, do you make more money?
8. As a percentage of revenue, does your overhead decrease as your revenue increases?
9. Can you add valuable revenue if you choose to?
10. Can your employees explain exactly how and why your business works to an outsider?

Check Your Standing

Take the time to answer these questions as honestly as possible, and give yourself a rating of 1-5 for each, with a 1 meaning “Not At All” and 5 meaning “Very Much So.” Be as neutral as possible.

Remember that you’re not measuring the heart you’ve put into your business, but the objective metrics by which a potential buyer will evaluate it.

Then the answers will yield a valuable, accurate assessment that will help you guide your business to a more valuable sale.

Once you’ve assigned a numerical value to each factor, add up the result. The chart below shows approximately how buyers will perceive businesses in various score ranges, what kind of offer you can expect, and how much that offer will multiply your business’s perceived earnings.

Conclusion

It may take some time to make a proper assessment. And whether or not you’re happy with your score will be subjective. One owner may be delighted with a score of 25 and the prospect of a 3x return on their business. Another may not be satisfied until they can reach the 4x or 5x level.

Regardless of your score, if you’re not happy with your results and you want to take your business to the next level, then let’s have a conversation.