Preparing for Exit Before You Sell

The worst time to start preparing a business for sale is probably the moment you've decided you want to sell it. By then, many of the things that will determine what somebody is prepared to pay have already become embedded in the business, often over many years. Customer concentration, revenue quality, management capability, financial reporting, margins and dependency on the founder are not things that suddenly become important because a buyer has appeared. They were always important. A transaction simply has a rather efficient way of exposing them.

I've seen this from both sides of the table over the years. Founders can spend decades building a business without ever having a particularly good reason to look at it as somebody else might. Then an approach arrives, or perhaps they decide the time is right to realise some of what they've created, and the perspective changes remarkably quickly. Questions that seemed relatively unimportant when the business was being run suddenly become central to what it is worth.

A customer representing 35% of revenue may have been regarded as a tremendous success when the account was won. To a buyer, it can look like concentration risk. A founder who knows every customer and makes every important commercial decision may have been one of the company's greatest strengths. To a buyer wondering what happens on the Monday morning after an acquisition, that same strength can begin to look like dependency.

Neither interpretation is necessarily wrong. What has changed is the perspective.

And that, I think, is where founders sometimes misunderstand exit preparation. It isn't really about making a business look better immediately before a sale. It is about building the sort of business that somebody else would be comfortable owning without you.

Buyers are buying the future

Founders are understandably attached to the history of their businesses. They remember the first customers, the difficult years, the risks they took and the occasions when things came remarkably close to not working at all. Those experiences matter because they explain how the business came to exist, but they don't necessarily explain what somebody else will pay for it.

A buyer is principally interested in what happens next.

Historic performance is evidence. It demonstrates that customers exist, that the business can make money and, hopefully, that there is some consistency to its performance. But the value a buyer places on that history depends largely on how confident they are that it can continue under different ownership.

This is where headline numbers can become misleading. Two businesses with £10m of revenue and £1.5m of EBITDA may look broadly comparable until you understand what sits underneath them. One may have contracted recurring revenue, hundreds of customers, a capable management team and several credible avenues for growth. The other may generate much of its profit from a handful of customers whose relationships sit almost entirely with the founder.

The historic financial results may be similar. The risk isn't.

And valuation, in my experience, is often as much about the perception of risk as it is about the numbers themselves.

This is also why the obsession with multiples can be unhelpful. Founders naturally want to know what multiple businesses in their sector are achieving, and it is a perfectly reasonable question. But a multiple is not something that exists independently of the characteristics of the business to which it is being applied.

The more predictable the future appears, the more confidence a buyer can place in the earnings they are acquiring. Reduce that confidence and the conversation begins to change. Sometimes that means a lower valuation. Sometimes it means deferred consideration, an earn-out or a longer period in which the founder is expected to remain involved. In some cases it means the buyer simply decides the risk isn't worth taking.

So perhaps the more useful question isn't what multiple your sector attracts. It is what would make somebody comfortable applying the better end of that range to your business.

The things that make a business valuable take time

One of the difficulties with exit preparation is that many of the most important improvements cannot be made quickly.

Customer concentration is a good example. If one customer represents 40% of revenue, there is very little that can be done about that six months before a sale without risking the revenue itself. Given three years, however, the business may be able to grow around that customer, diversify its customer base and turn what initially looked like a significant risk into simply a very good account.

Founder dependency behaves in much the same way.

Most successful founder-led businesses are dependent on their founder to some degree. That shouldn't be surprising. The founder often has the deepest market knowledge, holds key relationships and has spent years developing the instincts that allow them to make decisions quickly. For much of the company's life, those characteristics are strengths.

The difficulty comes when somebody else considers owning it.

If the buyer believes that the customers, knowledge or commercial momentum will leave when the founder does, they have to account for that risk. What was once an asset can become a dependency surprisingly quickly.

Removing it isn't achieved by writing an organisation chart. It requires capable people, genuine delegation, stronger processes and, most importantly, enough time for the organisation to demonstrate that it can operate without everything returning to the person who created it.

There is an uncomfortable irony here. Founders spend years making themselves indispensable because that is often what the business requires. Then, if they eventually want to realise its value, one of the most useful things they can do is make themselves progressively less important.

That transition is not really about exit. It is part of turning a founder-led company into an independently valuable business.

Due diligence doesn't create problems, it finds them

The same long-term thinking applies to financial and operational discipline.

When people talk about preparing a company for sale, the conversation often turns quickly to due diligence and data rooms. There is a tendency to think that if the documentation can be assembled and organised, the business is ready.

I've never thought of it that way.

The data room is simply where the evidence goes. Due diligence is the process through which a buyer discovers whether the business they've been presented with is actually the business they are buying.

Clean financial reporting cannot easily be manufactured immediately before a transaction. Neither can a history of well-documented contracts, robust systems, defensible intellectual property or consistent management information. You can tidy things up, certainly, but there is a significant difference between a business that has operated with discipline for several years and one that has hurriedly created the appearance of it.

Buyers tend to notice the difference.

More importantly, confidence during a transaction is cumulative. If the numbers reconcile, the forecasts have historically been credible, contracts are where they should be and management understands the business, the buyer gradually becomes more comfortable with what they are acquiring. If every answer creates another question, the process moves in the opposite direction.

That doesn't mean a business has to be perfect. I've yet to encounter one that is. Buyers expect to find issues.

What matters is whether those issues appear understood, controlled and reflected honestly in the way the business is presented. Surprises are considerably more damaging than imperfections.

Exit readiness is really about optionality

Perhaps the biggest misconception is that preparing a business for exit somehow means committing to selling it.

I think almost the opposite is true.

A business with diversified and predictable revenue, good financial reporting, strong cash generation, capable management and clear future growth opportunities is certainly easier to sell. But those same characteristics also make it a considerably better business to continue owning.

It can raise capital from a stronger position. It can make acquisitions. It can absorb setbacks. It can bring in new leadership. It can respond to an unexpected strategic opportunity without first having to repair years of accumulated weaknesses.

And if an unsolicited approach arrives, the founder has a genuine choice about whether to engage with it.

That distinction matters. There is a world of difference between selling because the right opportunity has appeared and selling because the business has reached a point where the founder no longer sees another viable path forward.

One creates negotiating leverage. The other tends to remove it.

This is why I increasingly think about exit readiness as another form of optionality. The objective isn't to predict precisely when the founder will want to sell. Life, markets and businesses are far too unpredictable for that. The objective is to create a business capable of being sold if and when the shareholders decide the time and terms are right.

In practice, that means starting much earlier than most people expect.

If a founder tells me they might want to sell in three years, I'm not particularly interested in beginning with a list of potential buyers. I'd rather understand what we would want those buyers to see when the time comes. Where is the business dependent today? Which customers represent too much risk? Does the management team have sufficient depth? How predictable are the earnings? Are the financials telling a clear story? And, perhaps most importantly, what is going to convince somebody that there is still meaningful growth available after they acquire it?

Those are useful questions whether the eventual transaction happens in three years, five years or never.

Because the work that makes a business attractive to somebody else is remarkably similar to the work that makes it more valuable to the people who already own it.

An exit is often described as an event, but the transaction is really the event. The value realised at that moment is the consequence of decisions made over many years before it, some of which increased value and some of which quietly increased risk.

By the time the buyer arrives, much of that story has already been written.

Perhaps, then, the question founders should ask isn't when they should start preparing to sell.

It is something rather more uncomfortable:

If somebody wanted to buy my business tomorrow, what would stop them paying the price I think it's worth?

The answer usually tells you where the work needs to begin.