Buyers pay for what they can verify. A business that earns well but can’t prove it sells for less, takes longer to close, or doesn’t sell at all. Most owners start getting ready the day they decide to sell. Start one to two years earlier and you control the price instead of the buyer.
These are the 5 things we look at first in any service business we consider, and what most buyers and their lenders will ask for.
1. Three years of clean books
Expect to hand over 3 years of tax returns and profit and loss statements, and expect them to be checked against each other. If the returns say one thing and the books say another, the buyer will go with the lower number.
Keep business and personal spending separate. Close the books every month, not once a year at tax time. If a bookkeeper or CPA isn’t already doing this, it’s the first thing to fix, because everything else on this list depends on it.
2. Owner earnings you can document
Small businesses are usually valued on owner earnings: the profit plus what the business pays you, plus costs that won’t continue under a new owner. Those extra costs are called add-backs. A personal vehicle run through the business, a one-time legal bill, or a family member on payroll who doesn’t work there are common examples.
Every add-back needs a receipt or a record behind it. A buyer will throw out any add-back you can’t prove, and each one thrown out lowers the price.
3. No single customer carries the business
If one customer brings in a large share of your revenue, a buyer sees the risk of losing that customer the week after closing. That risk comes off the price, or shows up as a payment that depends on the customer staying.
Spread revenue across more customers where you can. Put your largest accounts on written contracts, and check that those contracts can be transferred to a new owner.
4. The business runs without you
If every customer calls you, every quote goes through you, and every problem waits for you, the buyer is buying a job, not a business. Write down how the work gets done: quoting, scheduling, billing, hiring. Put a lead person in place your customers already know. Then take two weeks off and see what breaks.
5. Your paperwork is in one place
Leases, licenses, insurance policies, vehicle titles, an equipment list, employee roles and pay, customer contracts and permits. Pull them into one folder before anyone asks. Check whether your building lease and key contracts can be assigned to a buyer, because a lease that can’t transfer can stall a sale for months.
Where to start
Start with the books. Owner earnings, customer mix and the rest all get judged from them, and they take the longest to fix. Get 3 clean years behind you and the other four become a checklist instead of a scramble.
This is general education, not legal, tax or financial advice. Talk to your CPA and attorney before you sell.