Founders Exit Plan: 3 Years Before Sale
LAYING THE GROUNDWORK
Big picture planning (36+ months out): Three years before your intended exit, start setting the stage for a smooth sale. At this stage, you likely haven’t advertised your intentions, but you’re beginning to think like a buyer while clarifying your own goals.
Define your personal goals and timeline: Decide when you’d ideally like to sell and why. Are you aiming to retire at 55 and travel? Start a new venture in a few years? Understanding your goals will guide your decisions. Also, consider how long you’d be willing to stay post-sale for a transition (many buyers ask owners to remain for ~1 year).
Assess your business’s current state: Take a hard look at your company’s strengths and weaknesses. It might be worth getting a preliminary valuation now to see what your business is roughly worth and what factors drive that value. This early valuation can highlight gaps to address (e.g. customer concentration or weak margins) and align your expectations with reality.
Start tidying up financial records: Buyers will typically request three years of clean financial statements (profit & loss, balance sheets, tax returns). Ensure your books are accurate and transparent. If you’ve been lax on bookkeeping or commingling personal expenses, fix it now. Pay all taxes due (underreported income will hurt you later) and consider having financials professionally reviewed. This “clean-up” might take time, so start early.
Address any legal or structural issues: If your business structure isn’t ideal for a sale, now’s the time to change it. For example, ensure intellectual property is properly registered to the company, not you personally. Resolve any outstanding lawsuits or disputes if possible – you don’t want a buyer discovering legal troubles. Check that key contracts (leases, client agreements, supplier contracts) extend beyond your sale date or can transfer to a new owner without hassle.
Plan strategic upgrades or investments: Buyers value a company that is well-maintained and up-to-date. Identify areas where investment now could pay off in sale value. For instance, if you have outdated equipment or technology, consider upgrading instead of leaving it to the next owner (old machinery or tech that a buyer must replace will drive down your purchase price. Similarly, update your facilities for good “curb appeal” – a neat, well-run operation signals pride and less deferred maintenance to a buyer.
Document processes and reduce owner dependency: A common risk factor is when all the knowledge and relationships live in the owner’s head. Start documenting standard operating procedures (SOPs) for key aspects of the business (sales scripts, operational checklists, etc.). More importantly, empower your team to follow these processes – don’t just create a manual that collects dust. Begin delegating responsibilities and training employees to make decisions without you. The less the business depends on you personally, the more attractive (and valuable) it is to buyers.
Identify and mitigate major risk factors: Think about what would scare a buyer away or lower their offer. Do you have customer or vendor concentration (e.g. one client is 50% of revenue, or one supplier you can’t operate without)? If yes, work on diversifying to spread that risk. Are there any compliance issues (safety, environmental, licensing) unresolved? Fix them. High employee turnover? Improve culture and retention. Each risk you reduce now boosts buyer confidence later.
Start exploring exit strategy options: At this stage, keep an open mind about how you might exit. Common exit paths include:
Selling to an outside buyer (third-party sale): This could be a competitor or a larger company (strategic buyer) or a financial buyer (like a private investor or private equity). A third-party sale often maximizes price if multiple buyers are interested, but it depends on market conditions. Note that many businesses put on the market don’t actually sell due to lack of preparation or buyer interest, so preparation is key.
Selling to insiders (family or employees): You might consider passing the business to a family member or having management buy it. This can ensure continuity and preserve your legacy. The trade-off is your relatives or managers might not have enough capital, meaning you may receive the price over time or even potentially at a discount (and family dealings can get emotional). On the plus side, you know the buyers and the transition can be gentler.
Employee Stock Ownership Plan (ESOP): This is a specialized route where a trust buys shares on behalf of employees. It has big tax advantages for you and the company and lets you cash out gradually while your employees become owners. However, ESOPs are complex to set up and really only fit certain businesses (usually consistent, solid profits to support the buyout debt).
Merger or strategic partnership: Maybe joining forces with another company (merging) could achieve your exit. Mergers or acquisitions can sometimes fetch a higher combined value, but they are complex and success post-merger isn’t guaranteed (and the process can be as involved as a sale).
IPO (Going public): For most small businesses under $30M, an IPO isn’t realistic. It’s costly and requires stringent audits and disclosures. Unless your company is on a rapid growth track and can attract public investors, an IPO isn’t likely your path.
Gradual wind-down or liquidation: In a worst-case (or simplest-case) scenario, you could just liquidate assets and close the business when you’re done. This “lifestyle business” exit might make sense if a sale isn’t feasible. It’s straightforward but often yields the least value (you only get salvage value of assets, and employees lose their jobs). Consider this a fallback if a going-concern sale doesn’t pan out.
Milestone: By the end of this phase, you should have a clear vision of your exit goals and an action plan to boost business value. Your finances and operations should already be improving. You’re effectively “detailing the car before selling it” – cleaning up books, fixing issues, and making it shine. You’ve also signaled to any close family or key employees (confidentially) that you have a timeline for exit, so they can start preparing too.
