Preparing Your Business for Sale

Preparing Your Business for Sale: How Owners Build Value Before an Exit

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As M&A advisors, one of the most common questions we hear from business owners is deceptively simple: How do I prepare my business for sale? The question usually comes with urgency, but effective preparation is rarely urgent work. In fact, the most successful exits are the result of deliberate decisions made well before a transaction is on the horizon.

At its core, preparing a business for sale means understanding one fundamental truth: the value of your company is in the eyes of the buyer. Buyers do not pay for effort or personal sacrifice. They pay for future, transferable cash flow, and they discount that cash flow when risk is unclear or poorly managed.

For most family-owned companies, meaningful preparation should begin at least 18 to 24 months before going to market. This timeline allows owners to improve performance, correct structural weaknesses, and demonstrate consistency. Waiting until a deal is imminent usually results in missed opportunities and avoidable valuation discounts.

Below are the primary areas buyers consistently evaluate when determining value. Rather than viewing them as rigid categories, think of them as interconnected pillars that collectively shape a buyer’s perception of quality, risk, and upside.

Financial Transparency and Earnings Quality

Financial transparency is one of the most important factors buyers evaluate. Buyers place the highest value on companies with GAAP-compliant financial statements prepared by an independent CPA, because those statements establish credibility and reduce underwriting risk.

The level of trust a buyer places on financials depends heavily on the level of CPA involvement. Audited financial statements provide the highest level of assurance and are viewed as the gold standard, particularly for larger or more complex businesses. Reviewed financials offer a meaningful level of comfort through analytical procedures and inquiries, while compiled financials provide basic organization of results but limited assurance. Buyers will price risk accordingly when audited or reviewed statements are not available.

Regardless of the level of review, financial statements must be clean, consistent, and defensible. This includes cleaning up the balance sheet by removing excess cash and non-operating assets, writing off uncollectible receivables and obsolete inventory, eliminating shareholder or employee loans, and properly recording all liabilities such as accrued vacation, bonuses, and employee benefits.

Equally important is normalizing earnings. Owner compensation, personal expenses, and non-recurring or one-time items should be clearly identified and adjusted to reflect true operating performance. Credible financials build trust, accelerate diligence, reduce valuation disputes, and materially strengthen a seller’s negotiating leverage.

Management Depth and Owner Independence

Another significant valuation factor in the middle market is the extent to which a business depends on its owner. Companies that require the owner’s constant involvement to function are inherently riskier to buyers.

Preparing for a sale often means shifting from a founder-centric model to a management-driven one. Buyers look for capable leaders in key functions, clear decision-making authority, and accountability that extends beyond the owner. When leadership depth exists, buyers gain confidence that the business will continue to perform after the transition.

Retention is equally important. Incentive compensation, long-term rewards, and change-of-control arrangements for key managers help ensure continuity and preserve value through and beyond the transaction.

Revenue Quality and Customer Relationships

Not all revenue is valued equally. Buyers favor companies with predictable, diversified, and repeatable revenue streams.

Customer concentration is a common concern. When a small number of customers represent a large percentage of revenue, buyers perceive heightened risk. Sellers should work to diversify relationships where possible and formalize key accounts through contracts or long-standing agreements.

Equally important is how sales are generated. Businesses that rely heavily on the owner’s personal relationships or intuition-driven selling are less attractive than those with documented processes, pipelines, and measurable performance metrics. Predictability almost always outweighs short-term spikes in revenue.

Operational Discipline and Scalability

Operational strength reflects how well a business converts strategy into execution.

Companies that have documented processes, reliable systems, and consistent performance are easier to underwrite and easier to scale. Buyers look for operational clarity: how work gets done, how quality is maintained, and how issues are resolved.

Physical assets and facilities matter as well. Equipment should be maintained, suppliers diversified, and leases structured in ways that do not restrict future flexibility. Operational improvements often enhance both profitability and buyer confidence at the same time.

Strategic Direction and Forward Visibility

Buyers are not acquiring your past performance. They are acquiring your future potential. Companies that can clearly articulate where they are going, and why they are positioned to succeed, consistently command stronger valuations.

This does not require a glossy business plan, but it does require thoughtful preparation. Buyers want to see that management understands what drives growth, where opportunities exist, and what resources are required to capture them. Clear strategic priorities, supported by realistic assumptions, signal discipline and credibility.

Financial projections play an important role here. Strong projections are grounded in historical results and explain how growth will occur. When sellers cannot articulate their future strategy, buyers are forced to make assumptions, and those assumptions are rarely generous.

Market Positioning and Demand Generation

Buyers want to understand why customers choose your company and whether that choice is sustainable.

Strong market positioning includes a clear value proposition, well-defined target customers, and evidence that demand is systematic rather than accidental. Effective marketing does not need to be flashy, but it should be intentional and measurable. Buyers look for lead generation processes, conversion metrics, and a reasonable understanding of customer acquisition costs.

When a company can demonstrate consistent demand and explain how marketing efforts translate into revenue, it reduces buyer uncertainty and supports higher valuation multiples.

Workforce Stability and Organizational Health

A company’s people are often its most valuable, and most vulnerable, asset in a transaction.

Buyers assess whether the workforce is stable, appropriately compensated, and aligned with company goals. High turnover, misaligned incentives, or cultural dysfunction increase perceived integration risk. Identifying critical employees and implementing retention strategies well ahead of a sale can materially protect value.

Clear roles, performance expectations, and communication structures also signal organizational maturity. Buyers place a premium on businesses that operate cohesively rather than relying on informal knowledge or individual heroics.

Structural and Legal Readiness

Legal and structural matters rarely create upside, but they frequently create downside. From a buyer’s perspective, unresolved legal issues represent uncertainty, and uncertainty is always priced against the seller.

Well-prepared companies ensure that their corporate structure is clean, consistent, and defensible. This includes up-to-date formation documents, clear ownership records, and properly documented governance. Buyers will also examine customer and supplier contracts for assignability, termination rights, and change-of-control provisions. Informal agreements, handshake deals, or contracts tied personally to the owner raise red flags.

Intellectual property is another common issue. Proprietary processes, trademarks, software, and trade secrets should be clearly owned by the company and not the individual owner. Addressing these matters early prevents costly delays and last-minute concessions during diligence.

Final Thoughts

Preparing a company for sale is not a cosmetic exercise. It is a process of building value by improving performance, reducing risk, and increasing transferability. Owners who approach preparation thoughtfully, and early, gain control over timing, pricing, and deal structure.

The most successful exits are achieved by sellers who think like buyers long before they meet one. When preparation is intentional and disciplined, valuation becomes an outcome, not a surprise.

Considering a Sale?

If you are thinking about selling your business in the next two to three years, now is the time to start preparing. Early planning creates optionality, strengthens negotiating leverage, and often results in meaningfully better outcomes.

As M&A advisors to middle-market business owners, we work with sellers well before a transaction to identify value drivers, address risk, and position companies for a successful exit.

If you would like a confidential conversation about how prepared your business is for a future sale, or what steps you should be taking now, feel free to reach out.

Selling Your Business? How an M&A Advisor Adds Real Value

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For most business owners, selling their business represents the largest and most consequential financial transaction of their lives. It’s the culmination of years, or even decades, of effort, sacrifice, and risk-taking. Given what’s at stake, it’s essential that the sale process is managed with precision, professionalism, and discretion.

That’s where a sell-side M&A advisor plays a critical role.

When a business owner engages an M&A advisor to lead the sale of their business, they’re not just hiring someone to find a buyer. They’re hiring a strategic advisor, negotiator, project manager, and market expert whose singular mission is to deliver the best possible outcome – maximum value, optimal terms, and minimal disruption.

Here’s a breakdown of the comprehensive services an M&A advisor provides to a business owner preparing to sell:

1.  Establishing a Realistic and Data-Driven Business Valuation

The first step in preparing a business for sale is understanding its market value. While many owners have a rough idea of what they believe their business is worth, it’s the M&A advisor’s job to validate, or reset, those expectations based on data and real market dynamics.

A proper valuation considers:

  • Historical financial performance
  • Forward-looking earnings potential
  • Industry trends and comparable transactions
  • Customer and revenue concentration
  • Profit margins, scalability, and working capital requirements
  • Company-specific strengths and risks

Beyond just providing a number, a skilled M&A advisor explains how buyers will perceive value and what adjustments (such as EBITDA normalization or working capital targets) are likely to be made. This sets a realistic foundation for negotiations and avoids costly surprises down the road.

2. Crafting the Confidential Information Memorandum (CIM)

Once the business is market-ready, the next step is building a compelling story; one that will resonate with qualified buyers. This comes in the form of a Confidential Information Memorandum (CIM), a detailed document that outlines the company’s operations, financials, market positioning, and growth prospects.

The CIM typically includes:

  • Executive summary
  • Company history and ownership structure
  • Product or service overview
  • Customer base and revenue breakdown
  • Supply chain and operations overview
  • Management team profiles
  • Financial statements and performance analysis
  • Industry trends and competitive landscape
  • Strategic growth opportunities and projections

M&A advisors specialize in presenting this information in a way that is clear, credible, and buyer-friendly. A well-written CIM doesn’t just inform, it persuades.

3.  Designing a Targeted Go-to-Market Strategy

With the CIM in hand, the M&A advisor develops a customized marketing strategy to take the company to market. The objective is to generate interest from the right buyers, not just any buyer.

This involves identifying:

  • Strategic buyers – typically competitors, suppliers, customers, or adjacent businesses that could achieve synergies post-acquisition
  • Private equity groups – financial sponsors seeking platform or add-on acquisitions
  • Family offices and independent sponsors – increasingly active players in the lower middle market
  • Search funds and individual investors – often backed by institutional capital

Each process is tailored to the seller’s objectives. For some, a broad, competitive auction may be appropriate. For others, a more limited, confidential outreach to a select group of buyers may be preferable. In either case, confidentiality is paramount, and all buyer contact is conducted under strict non-disclosure agreements (NDAs).

4.  Managing Confidential Buyer Outreach and Qualification

Buyer outreach is conducted discreetly, often starting with a blind summary (“Teaser”) that highlights the company’s value proposition without revealing its identity. Interested buyers are vetted through a screening process before they receive the CIM.

This screening includes:

  • Verifying financial capacity to complete a transaction
  • Assessing strategic interest and cultural alignment
  • Reviewing acquisition history and credibility
  • Confirming source of funds (especially important for private buyers)

M&A advisors act as a filter, ensuring that only serious, qualified parties move forward in the process. This protects the seller’s time, reputation, and internal confidentiality.

5.  Hosting Buyer Meetings and Managing the Diligence Process

After initial expressions of interest (Indications of Interest or IOIs), the M&A advisor coordinates management presentations where buyers meet the leadership team and get a deeper understanding of the business.

At this stage, the advisor:

  • Prepares the seller for presentations and Q&A
  • Facilitates logistics and buyer communication
  • Manages expectations and timelines
  • Oversees the secure virtual data room for due diligence

This is where buyer interest becomes more tangible. M&A advisors maintain process discipline to keep multiple parties engaged, avoid deal fatigue, and build competitive tension.

6.  Negotiating Offers and Structuring the Deal

As buyers move from preliminary interest to formal offers (Letters of Intent or LOIs), the advisor takes the lead in evaluating, negotiating, and improving deal terms.

An LOI typically outlines:

  • Purchase price and structure (cash, stock, earnout, seller note, etc.)
  • Working capital targets
  • Post-close roles for the seller or management
  • Exclusivity period
  • Timeline to closing

The advisor helps the seller assess not just the headline price, but the full economic and legal picture. Is the offer fully financed? Is there a potential earnout? Are there indemnification caps? What’s the tax impact?

By managing negotiations, the advisor ensures the seller doesn’t leave money on the table or accept risky or overly complex deal structures. Competitive tension is often leveraged to improve terms, increase valuation, or accelerate timelines.

7.  Managing the Process Through to Closing

Even after an LOI is signed, there’s a long road to closing. Due diligence becomes more intense, attorneys begin drafting definitive agreements, and third-party approvals may be required.

The M&A advisor remains actively involved to:

  • Coordinate diligence checklists and timelines
  • Work alongside the seller’s legal and accounting teams
  • Resolve deal issues and manage surprises
  • Serve as a buffer between buyer and seller when needed
  • Keep all parties aligned and moving toward closing

Deals can be emotionally and logistically complex. Having a dedicated deal quarterback is invaluable to protect the seller’s interests and reduce the risk of a broken deal.

8.  Preserving Confidentiality and Business Focus

One of the most underappreciated but vital roles an M&A advisor plays is protecting confidentiality throughout the sale process. Premature leaks can create uncertainty among employees, customers, suppliers, and competitors, potentially damaging the business.

By managing communications, enforcing NDAs, and controlling access to sensitive information, the advisor allows the business to continue operating without distraction or disruption.

Just as importantly, they free up the seller to remain focused on performance. Deals can take 6–9 months (or more), and any decline in financial performance during that time can materially affect valuation or jeopardize the transaction. The advisor absorbs the burden so the business owner can continue to lead effectively.

Final Thoughts: A Partner for the Most Important Transaction of Your Life

Engaging an M&A advisor is not an expense; it’s an investment in the outcome of your life’s work. From strategic preparation to deal execution, an experienced advisor brings clarity, confidence, and results to what is often a complex and emotionally charged process.

If you’re considering selling your business in the near future, or even several years out, having an early conversation with a qualified M&A advisor can help you understand your company’s value drivers, address potential risks, and ensure you’re in the strongest position when the time is right to go to market.

After all, you only sell your business once!

Bridge The Gap

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Economic uncertainty, volatility in the capital markets, and financing restrictions have created a challenging environment for committed buyers and sellers in the lower middle market. Foremost, valuations have come under deep scrutiny. Having reached all-time highs prior to the pandemic, buyers and sellers may find it difficult to align valuation expectations. Some considerations for both parties to creatively bridge the valuation gap:

  • Earnouts – arguing for “COVID add backs” due to the extraordinary, one-time nature of the pandemic, sellers may obtain the full value for their business through an earnout. A simple, well-defined package, including performance metrics, time frame, and strategic plan, will align the buyer’s business objectives with the seller’s incentives.
  • Buyer’s Stock – to preserve cash, buyers may consider using their own stock to fund a purchase. Sellers may benefit from the future growth of the business, and if structured properly, may realize some tax advantages.
  • Seller’s Note – to preserve cash or if access to capital is an issue, buyers may request a Seller’s Note. Often loathed, a Seller’s Note may protect the purchase price, provide interest on the note, and have favorable tax consequences for sellers.

Despite the unprecedented circumstances of the current market, a knowledgeable M&A team can help you navigate the process and deliver a viable solution.

This Too Shall Pass

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With the peak of the COVID-19 pandemic presumably in our rear view, the future for mergers and acquisitions in the lower middle market remains uncertain and unpredictable in the short-to-near term. Many strategic buyers (e.g. same industry or business) have adopted a wait-and-see approach to potential transactions, while financial buyers (i.e. private equity groups) have gone inward, focusing on securing and protecting their existing portfolio companies.

Potential sellers do not despair; according to the PWC report, “Succeeding through M&A in Uncertain Economic Times,” US public companies now hold more than four times as much cash as they did a quarter-century ago, and the capital that US private equity firms have available for investment but haven’t yet deployed has never been higher.

Business owners contemplating a liquidity event should start their planning early, consult with a knowledgeable M&A Team, and focus on maximizing value. A decrease in financial benchmarks from the COVID-19 crisis is expected and understandable. How your company and management team navigate this downturn will be critical to the value of your business.

COVID-19 Impact on Merger & Acquisition Transactions

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Many acquisition processes are being put on hold pending further clarity on the broader health and economic consequences of COVID-19. In the future, the impact of the pandemic on buyers and sellers will be seen in a wide range of implications, including a “new” focus on:

  • Preparing for sale – is it the right time; what are current valuations; will full value be recognized.
  • Timing – in this period of uncertainty, additional time is needed to meet new logistical challenges for satisfying relevant requirements.
  • Due Diligence – heightened scrutiny in all areas of due diligence is seen; more robust inquiry regarding Force Majeure Clauses in key contracts; emergency preparedness and insurance coverages.
  • Acquisition agreements – allocating the increase risk brought on by COVID-19 between buyers and sellers in acquisition agreements through the mechanisms of earn-outs, representations & warranties, interim operating covenants, closing conditions, termination fees and special indemnification provisions based on coronavirus-related due diligence findings.
  • Financing – is attractive, long-term lending available.

Companies engaged in mergers and acquisitions should seek the guidance of their advisors to deal with current market volatility, increased risk and uncertainty posed by the spread of the virus.

The Doomsday Ratio

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Is your company prepared to survive a Doomsday scenario? Without quantifiable measurements in place, it may difficult to know how your business is actually performing. Financial ratios or benchmarks are used to assess the financial health of a company. The company’s financial statements, primarily the income statement and balance sheet, are converted to a standardized format (ratio or percentage) and compared over time, to similar companies or the broader industry.

Liquidity ratios, specifically, are critical financial ratios in times of crisis. Liquidity ratios measure a company’s ability to pay off short-term obligations without raising external capital. Liquidity ratios include the current ratio, quick ratio, days sales outstanding, and the Doomsday Ratio. The Doomsday Ratio is the most conservative, assumes the worst (hence the name), and blatantly ignores any assets of the company except cash and cash equivalents. Calculated as cash and cash equivalents divided by current liabilities, the Doomsday Ratio determines the adequacy of the amount of cash on hand, and it’s most useful when tracked over time.

Financial ratios, including the Doomsday Ratio, are nuanced. An experienced M&A team can help you understand and navigate their impact on your business and operations.

The Strategic Exit

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If you are considering a sale of your business in the near future, strategic buyers, or corporate acquirers, must be at the top of your prospective buyer’s list. Strategic buyers operate in the same industry or business and may include competitors, suppliers, or clients of your company. The main objective of strategic buyers is to find companies whose products or services complement or integrate seamlessly with their established enterprise for long-term value creation.

Motivated by economies of scale, new product lines, new geographical markets, more channels of distribution, or other synergistic opportunities, strategics are highly qualified buyers and among the very best purchasers of middle market businesses. AND, they pay more! Synergies and integration capabilities of the two entities creates additional value. Furthermore, you exit with the transaction, and overlapping costs are eliminated. With a deep understanding of your business, strategic buyers also ensure an efficient transaction process and timely close. Lastly, long-term clients win with new product and service offerings.

It’s not uncommon for strategic buyers to act like financial buyers and make acquisitions to boosts top-line revenues and earnings, or for financial buyers with portfolio companies in your space to make strategic add-on acquisitions. An experienced M&A Team will understand the different buyer motivations and help facilitate a successful transaction.

Balance Sheet Analysis

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In most merger & acquisition (M&A) transactions, valuations are determined based on the income and cash flow of the company. Furthermore, the character and makeup of the balance sheet must also be assessed when evaluating a company for a transaction. Negotiating balance sheet target values should be an early and meaningful part of Middle Market transactions. These outcomes may significantly alter the value of the total transaction value.

Working capital is generally defined as the current assets less the current liabilities of a company. For purposes of an M&A transaction, understanding and establishing an “adequate” level of working capital is very important and generally included in the purchase price. Typically, cash and bank lines of credit are not included in the calculation of transactional working capital.

There is no standard convention for determining “adequate” working capital in a transaction. Significant differences will occur between the sell-side and buy-side points of view. An experienced M&A team may derive an additional 5% to 15% of the purchase price in negotiating adequate working capital.

The Value of Confidentiality

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Nearly every M&A advisor would agree that confidentiality is the foundation upon which successful transactions are built. Confidentiality is paramount throughout the M&A transaction process, but this is especially true when it concerns:

  • the seller’s employees
  • the seller’s customers and vendors
  • the seller’s competitors and the public
  • public companies and the possibility of insider information

Middle Market business owners vary in their employee disclosure approach. Some choose to refrain from disclosing any information to employees; confiding only with trusted advisors. Whereas other owners may control the disclosure; dictating the dialogue with the intent of alleviating employee concerns.

A comprehensive nondisclosure and/or confidentiality agreement should be designed in a manner that prevents a seller’s business from being harmed by disclosing to outside parties the actual name of the company, the financial and business details of the company (typically outlined in the Confidentiality Information Memorandum), and especially, the “proprietary juice” that differentiates the company from its competitors.

Often downplayed as a formality of doing business, confidentiality should be addressed by buyers and sellers and their respective M&A teams early in the transaction process.

Quality of Data Drives Deals

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The quality of data is the most commonly overlooked risk factor of business owners pursuing a sale of their business in the marketplace. Owners must be able to provide prospective buyers with evidence to support their earnings and their adjustments to earnings. Poor data quality is usually linked to:

  • Antiquated accounting systems
  • Incorrect revenue recognition
  • Untimely account reconcilement
  • Outdated financial records and software
  • Weak or non-existent controls over assets
  • Important contracts that are not retained
  • Notable transactions that are not fully documented
  • Difficulty extracting data from company systems

Few hard-driving entrepreneurs perceive the cost of keeping accurate accounting records on the accrual basis and updated IT systems to be value-added costs; however, neglect of these key functions not only reflects poorly on the owner and their ability to run the business, but it may even sacrifice the buyer’s ability to close a deal.

If you are considering the sale of your business, engage an experienced M&A Team to assist with mitigating risk factors such as quality of data before approaching prospective buyers.

Allston Advisory Group is an experienced boutique M&A advisory firm providing a variety of services to lower middle market companies. See our footer for contact information.

(502) 742-2933
[email protected]
P.O. Box 21266, Louisville, KY 40221

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