How do you increase business value before an exit?

Buyers pay for earnings they can count on after you leave, so the work is to reduce what a buyer has to worry about: dependence on you, a few large customers, books that do not reconcile, and earnings that do not recur. Those changes take time to show up in your results.

You may be a few years from a possible exit, or someone has just asked what you would fix if you had more time. The answer is a short list, and most of it is about risk rather than growth.

What do buyers actually pay for?

Earnings they expect to continue. The IRS ruling that valuation professionals use as a starting point for closely held companies says that uncertainty about the stability or continuity of future income lowers value, because it raises the risk of losing earnings. A buyer restates your earnings, then applies a multiple that reflects the risk left over, as what moves an exit multiple explains.

Which changes matter most?

The ones a buyer's team will test. Each has a first step you can start without anyone's help.

Many of these points appear in a quality-of-earnings review, an independent report that tests whether a company's earnings are reliable, sustainable, and accurate. The SBA requires one for acquisition loans at a purchase price of $3 million or more. It reconciles the financial statements, tax returns, and IRS transcript data, and it assesses customer concentration risk, contract continuity, and the likelihood that revenue and margins will hold after the sale.

How does dependence on the owner show up?

It is among the hardest items to fix late. If clients call you, suppliers know only you, and every decision waits for you, a buyer has to price the chance that revenue leaves when you do. The IRS ruling makes the same point about the loss of the manager of a "one-man" business, and it names offsetting factors, such as competent management that can be hired in the manager's place.

A buyer reads a written procedure, a named successor for each function, and a customer who has dealt with someone besides you as evidence that the business can continue. Why growing revenue can still lower business value covers the customer and margin side of the same question.

How long should you prepare?

As early as you can. Cleaner books and a record of steady, recurring earnings show up only after several periods of results, so a change made during a sale process counts for less than one with a track record behind it. A lender financing a purchase through the SBA analyzes the three most recent year-ends, so three years is the history a buyer will see.

Do you need help with this?

You can start without it: list what depends on you, split revenue by customer, and reconcile your books. A second view helps most with restating your earnings and with the questions a buyer's team will ask. The SBA's guidance for sellers says it is helpful to seek advice from a business evaluation expert. A fractional CFO, meaning senior finance leadership on your team part-time, is one way owners get that view.

What to do next

1. Write down what only you do, and choose one item to hand off this quarter.
2. Split revenue by customer and by contract, and read each large contract's assignment and termination language.
3. Reconcile the last three years of financial statements to your tax returns and bank statements.
4. Separate recurring from one-time revenue in your monthly reporting.
5. Name who owns each function, and write down the procedures a new person would need first.

We rebuild your earnings the way a buyer will, set out a valuation range, and prepare the materials a buyer asks for, and a fractional CFO can carry the monthly work. See our M&A advisory and fractional CFO work.

Questions owners ask

Does this apply to a smaller company?

The questions are the same, and the formality changes. Under the SBA's rules for acquisition loans, an independent valuation is required above $350,000 and a quality-of-earnings report at $3 million and above. How to finance a business acquisition describes what a buyer's lender examines.

Is my company the right size for a private equity buyer?

Size thresholds differ by buyer, and what size companies private equity firms acquire covers them.