How Early Should You Start Planning to Sell Your Business?

Earlier than you think. Three to five years is not too early, and the best exit plan is building a business that doesn't need you every day.

Not tax or legal advice. This article is general information based on my own experience selling a business. Every business and deal is different. Talk with your own CPA, attorney and financial advisor before acting on anything here.

The short answer

Start three to five years before you think you might sell. Many of the tax strategies that can lower the tax on a sale only work if they're set up well before a buyer is involved, and the changes that raise your price, like a business that runs without you every day, take years to show up in the numbers. The real answer is simpler: start building a business you don't need to sell.

I was an expert in my field and a rookie in M&A

I ran my company for 16 years before selling it to a private equity buyer, then stayed on for one more year through the transition. I knew my industry cold. But when the buyer showed up, I was a beginner. It was the biggest deal of my life, in a game I had never played.

The most valuable thing I did for that sale, I did years before anyone called. It wasn't a tax move or a spreadsheet.

I stopped taking my laptop home

At some point I stopped working evenings and weekends and started running the business like a real job, eight to five. That forced a change. If I wasn't going to be the glue holding everything together, I had to put people and processes in my place.

It didn't happen overnight, and the business never fully ran without me. But it became scalable. And the strange part: we made more money than we ever had, and I started making decisions about the business instead of just getting it through the day or the month.

What due diligence showed me

When the buyer's due diligence came, that work showed. Diligence also showed me everything I hadn't fixed: my books, how we accounted for things, and numbers buyers care about that I had never looked at that way.

Then there were taxes. After closing, I learned there were ways to defer, and sometimes reduce, the tax on a sale. Most of them only work if they're set up years before a deal is on the table. I found out too late.

So how early is early enough?

Three to five years out: talk with your CPA and estate attorney about structure and tax planning, and start making the business less dependent on you.
Two to three years out: clean up your books, document how the business runs, and get your contracts in order.
One to two years out: understand what your business is worth, who might buy it, and what they'll look for.

A business that doesn't need you every day has the most options. You can keep it, hand it down, or sell it on your terms, and it's worth more either way.

One thing to try this week

Take one evening fully off and see what breaks. Whatever breaks is your first project.

How early should you start planning your exit?