What You Do Today Determines What You’ll Receive Tomorrow

Every business owner will eventually exit their business. Whether through a strategic sale, a merger, a management buyout, a family succession, or simply closing the doors, your ownership will end at some point.

The question isn’t whether you’ll exit—it’s whether you’ll be prepared when the time comes.

Business owners who plan their exit in advance consistently achieve better outcomes than those who react to circumstances. They sell for higher valuations, structure transactions more tax-efficiently, experience smoother transitions, and move forward with fewer regrets about what might have been.

At Boulder CPAs, we’ve guided numerous business owners through the sale process—from initial valuation through closing and beyond. This experience has shown us that the decisions made years before a sale often matter more than the negotiations at the closing table.

Why Start Planning Early

Many business owners assume they’ll start thinking about selling when they’re ready to retire, when a buyer approaches them, or when they simply get tired of running the business. This reactive approach leaves value on the table.

Here’s why early planning matters:

Fixable problems take time to fix. If your financial records are disorganized, your customer concentration is too high, your processes depend entirely on you, or your profitability has been inconsistent—these issues can be addressed. But not overnight. Cleaning up financials might take a year or more. Diversifying your customer base could take two to three years. Building a management team that can operate without you might take longer still.

Discovering these issues when a buyer is conducting due diligence is too late. The problems either kill the deal or dramatically reduce the price.

Tax planning requires advance action. The difference between a well-structured sale and a poorly structured one can be hundreds of thousands of dollars in tax savings—or more. But many tax-efficient strategies require years of advance planning. Installment sales, Qualified Small Business Stock treatment, charitable planning vehicles, and trust structures all have timing requirements that can’t be compressed.

You negotiate from strength, not desperation. Sellers who must sell—due to health issues, burnout, partnership disputes, or financial pressure—negotiate at a disadvantage. Sellers who have prepared, who have multiple options, and who can walk away from a bad deal consistently achieve better terms.

Understanding How Buyers Value Businesses

Before you can maximize your business’s value, you need to understand how buyers determine what they’re willing to pay.

Most small and mid-sized business valuations start with some measure of earnings—typically EBITDA (earnings before interest, taxes, depreciation, and amortization) or seller’s discretionary earnings (SDE, which adds back the owner’s salary and benefits to EBITDA). Buyers then apply a multiple to this earnings figure based on the perceived quality, risk, and growth potential of the business.

The earnings base matters enormously. Buyers will scrutinize your financials to determine “normalized” or “adjusted” earnings—what the business would earn under typical conditions with a new owner. They’ll add back one-time expenses, personal expenses run through the business, and above-market owner compensation. They’ll subtract for any non-recurring revenue, below-market rents or salaries paid to family members, and owner contributions that won’t continue.

The goal is identifying the true economic earnings a buyer can expect to receive.

The multiple reflects quality and risk. Two businesses with identical EBITDA can sell for very different prices based on factors that affect the multiple. Higher multiples go to businesses with recurring or contractual revenue, diversified customer bases, strong management teams beyond the owner, defensible competitive advantages, demonstrated growth trajectories, and clean, auditable financial records.

Lower multiples apply to businesses with concentrated customers, owner-dependent operations, project-based or volatile revenue, limited growth prospects, and financial records that require reconstruction.

Understanding which factors drive multiples helps you focus improvement efforts where they’ll have the greatest impact on valuation.

The Financial Cleanup Process

Buyers expect clean, accurate, understandable financial statements. If your books are messy, incomplete, or intermingled with personal transactions, you’ll face one of three outcomes: sophisticated buyers will walk away, remaining buyers will discount their offers to account for uncertainty, or due diligence will uncover issues that crater the deal after you’ve invested months in the process.

Separate business and personal completely. Every personal expense running through the business creates a conversation in due diligence. Yes, these expenses typically get added back to earnings—but they also raise questions about what else might be lurking in the numbers, suggest a casual approach to financial management, and complicate the earnings normalization process.

Starting now, run the business as if a buyer were looking over your shoulder. The cleaner your books, the easier the sale process.

Implement accrual accounting if you haven’t already. Cash-basis accounting is simpler but obscures the true economics of your business. Buyers want to see revenue recognized when earned and expenses matched to the periods they benefit. Converting to accrual accounting before you’re in due diligence gives you time to produce comparative historical statements.

Develop reliable financial reporting. Monthly financial statements, prepared timely and consistently, demonstrate operational discipline. Budgets and variance analysis show you understand what drives performance. Key performance indicators tracked over time reveal trends that support your growth narrative.

If you’re producing annual financial statements three months after year-end and nothing in between, start building better reporting infrastructure now.

Consider a financial statement review or audit. For larger transactions, buyers may require reviewed or audited financial statements. Even when not required, having a CPA firm review your financials adds credibility and surfaces issues before a buyer does. The cost is modest compared to the risk of surprises in due diligence.

Operational Improvements That Drive Value

Beyond financial cleanup, certain operational improvements can significantly impact valuation.

Reduce customer concentration. If any single customer represents more than 15% to 20% of revenue—or if your top five customers represent more than 50%—buyers will perceive risk. What happens if that customer leaves? Diversifying your customer base takes time but directly impacts both the multiple buyers will pay and the structure of any deal (concentrated customer risk often results in larger earnouts or seller financing).

Document your processes. A business that runs on institutional knowledge locked in the owner’s head is worth less than one with documented processes, training materials, and operational playbooks. Buyers want confidence that they can operate the business successfully after you leave.

Build management depth. If you’re the only person who can make decisions, close sales, manage key relationships, and solve problems, you’re not selling a business—you’re selling a job. Building a management team that can operate day-to-day without your constant involvement takes years but transforms your business from owner-dependent to transferable.

Strengthen recurring revenue. Recurring revenue—from subscriptions, service contracts, maintenance agreements, or other ongoing relationships—is valued more highly than one-time project revenue. If your business model allows, shifting toward recurring revenue streams can significantly impact valuation.

Protect intellectual property. If your business has valuable intellectual property—proprietary processes, software, patents, trademarks, or trade secrets—ensure it’s properly protected and owned by the business entity, not by you personally.

Tax Planning for the Sale

The tax implications of a business sale are substantial—and the difference between good and poor planning can easily reach six or seven figures for a successful business.

Asset sale versus stock sale. Buyers generally prefer asset sales because they get a stepped-up basis in the assets they acquire, resulting in larger future depreciation deductions. Sellers generally prefer stock sales because they avoid depreciation recapture and may achieve more favorable capital gains treatment.

Understanding which structure makes sense for your situation—and how to negotiate the tradeoff—requires analysis well before you’re at the negotiating table.

Installment sales. Receiving sale proceeds over time rather than at closing can spread taxable gains across multiple years, potentially keeping you in lower tax brackets. Installment sales can also provide ongoing income during retirement. But they carry risk—if the buyer defaults, you may have paid tax on money you never received.

Qualified Small Business Stock. If your business is a C Corporation and meets certain requirements, you may be eligible to exclude up to $10 million in capital gains from federal tax when you sell. But the requirements are specific, and the stock must have been held for at least five years. This isn’t a strategy you can implement at the last minute.

Charitable planning. Donating appreciated business interests to charity before a sale can generate significant tax benefits while supporting causes you care about. Charitable remainder trusts, donor-advised funds, and direct donations all have different implications and requirements.

State tax considerations. State tax treatment of business sales varies significantly. For business owners considering relocation before a sale, understanding the timing and requirements is essential.

The Due Diligence Gauntlet

Once you have a buyer and a letter of intent, due diligence begins. Buyers will examine every aspect of your business: financial records, tax returns, contracts, employee files, customer relationships, legal matters, insurance, regulatory compliance, intellectual property, and more.

Businesses that survive due diligence cleanly share common characteristics. Their financial records are organized, complete, and reconciled. Contracts with customers, vendors, and employees are documented and accessible. Corporate records are maintained properly, including board minutes, ownership records, and regulatory filings. Potential liabilities have been identified and addressed. No surprises emerge that weren’t disclosed upfront.

Preparing a due diligence package before you go to market—anticipating what buyers will ask for and having it ready—accelerates the process and demonstrates professionalism that supports your valuation.

The Role of Your Advisory Team

Selling a business requires expertise in multiple areas—financial analysis, tax planning, legal documentation, deal negotiation, and transaction execution. Attempting to navigate this process alone is risky and often leaves significant value on the table.

Your advisory team should typically include a CPA with M&A experience to handle financial preparation, tax planning, and due diligence support, an attorney experienced in business sales to draft and negotiate legal documents, and potentially a business broker or M&A advisor to help identify buyers, manage the sale process, and negotiate deal terms.

At Boulder CPAs, we work closely with business owners preparing for sale—often beginning years before an actual transaction. We help with financial cleanup and statement preparation, earnings normalization and valuation analysis, tax planning and transaction structuring, due diligence preparation and support, and coordination with legal counsel and other advisors.

Starting the Conversation

If you’re thinking about selling your business in the next three to five years—or even if an exit is a more distant possibility—starting the planning process now gives you more options and better outcomes.

An initial conversation might cover the current estimated value of your business, factors that could increase or decrease that value, financial cleanup priorities, tax planning opportunities that require advance action, and a timeline for preparation activities.

You don’t need to have a firm exit date in mind. The goal is understanding where you stand and what steps would position you optimally whenever you decide to move forward.