You are somewhere between three and seven years from being done. You have not told your employees. You may not have said it out loud to your spouse in specific terms. And you have started to wonder what it would actually take to turn the business over to someone else and walk away without regret.
That question has a practical answer, and the answer is longer than most owners expect. Preparing a business for sale is not a project you start when you decide to sell. It is a process. It is a set of changes to how the company operates, and the changes that matter most take years to show up in the numbers a buyer looks at.
The Exit Planning Institute’s 2025 Generational National State of Owner Readiness Report found that 75% of owners plan to exit within ten years, but just 13% have a formal exit plan. Among Baby Boomers, the owners closest to the door, only 5% have assembled a formal exit planning team. The same report found the business represents roughly 80% to 90% of the typical owner’s net worth. That is a lot of money riding on a plan most people have not written.
This is the first post in a five-part series on preparing your business for sale. We start with the financials, because that is where a buyer starts. The rest of the series covers tax efficiency, the right people in the right seats, operations, and sales and marketing.
The financial runway breaks into three stretches. None of it requires you to decide anything today.
Years five and four: build the financial record
A buyer is not buying your opinion of the business. They are buying a documented history they can verify. The first two years of the runway are about creating that history, because you cannot go back later and make it exist.
Conduct a fair market valuation. Most business owners do not have a true understanding of what their business is worth, or what the market would value it at in a potential transaction. Establishing a baseline value is the starting point for running a successful exit planning process and achieving maximum value on sale.
Get your financial statements to a level someone will trust. Most lower-middle-market companies run on internally prepared statements, generally by a bookkeeper but oftentimes by an office manager or the owner’s spouse. It is recommended that you start keeping your books in a manner that will survive due diligence. Having fractional CFO oversight, keeping them on an accrual basis, closing your books monthly, and having an annual budget that you measure progress against each month is a good start to demonstrating fiscal responsibility.
Clean books are worth real money in a transaction. When a buyer’s quality of earnings (Q of E) team digs into the company’s financials, the fewer questions and adjustments they are required to suggest, the better the outcome and the smoother the process will go.
Separate the business from your household. The boat, the truck your son drives, the country club membership, the family cell phone plan, the salary you pay a relative who does not work there. Every one of those becomes an add-back you have to argue for. Some are legitimate normalizing adjustments. All of them are questions. The cleanest thing you can do in years five and four is stop creating new ones and start unwinding the old ones. At a minimum, establish a singular account where all of these perks are coded.
Look hard at customer concentration. Pull the last three years of revenue by customer and rank it. It is important to understand what percent of revenue your top three, five, and ten customers represent. If your top customer is a quarter of revenue, a buyer sees a business that could lose 25% of its sales in one phone call. Diversifying is slow work, which is exactly why it belongs at the start of the runway and not at the end. Where you cannot diversify, you can at least document it: written agreements, renewal history, and relationships that go deeper than you personally.
Years three and two: clean up what a buyer will question
By now you have a few years of clean numbers. This stretch is about the paperwork behind them. In due diligence, a buyer’s advisors will test whether the revenue and costs on your statements are as solid as they look.
Get your contracts and records in order. Make sure all key customers are under some level of signed agreement, and that your key commitments to suppliers, lenders, and your landlord are in writing. Revenue built on a handshake is hard for a buyer to count on. While you are reading those agreements, look for change-of-control or assignment language that lets the other party walk or renegotiate when the business changes hands. Find that at renewal and you have leverage. Find it in diligence and you are asking a favor while a buyer watches.
Then look at the people on your payroll and your 1099s. Anyone you pay on a 1099 should be a truly independent contractor, not an employee under another name. Every employee should have a completed Form I-9 on file. Sales tax should be collected and filed correctly. None of these get better with age, and every one that turns up in diligence becomes an indemnity or an escrow, meaning money held back from your proceeds.
The biggest deal killer is a surprise the seller did not disclose.
The final twelve months: do not coast
Three things go wrong in the last year. Owners pull cash out, stop investing, and stop selling.
Working capital. In most transactions the buyer expects the business to be delivered with a normal level of working capital, and “normal” is usually calculated from a trailing average. If you spend the last year stretching payables, sweeping cash, and letting receivables age, you are not putting more money in your pocket. You are handing yourself a purchase price adjustment. Run the business the way you always have.
Deferred capital expenditures (capex). The five-year-old truck you did not replace, the roof, the software upgrade you postponed. Buyers price deferred maintenance. They walk the yard and the shop floor, and they can tell. Postponing a $60,000 equipment replacement to protect one year of earnings can cost you a multiple of that at close, because a buyer will discount for the whole category of “what else was deferred,” not just the truck.
Keep growing. A flat or declining trailing twelve months is the most expensive thing that can happen in your final year. It weakens every argument you want to make about the future.
What buyers are paying, and how they pay it
BizBuySell recorded 9,586 reported small business transactions in 2025, with a median sale price of $350,000 and median revenue of $703,000. Those are Main Street businesses. They closed at an average of 94% of asking price and took a median of 170 days to close.
The IBBA and M&A Source Market Pulse survey covers larger lower-middle-market deals. Their Q4 2025 report puts average multiples at 4.1x EBITDA for businesses selling for $2 million to $5 million, and 5.5x EBITDA for $5 million to $50 million. Sellers received between 76% and 89% of the price in cash at closing, depending on deal size.
Read those structure numbers the right way. Most of the price is paid in cash at closing. When a deal comes back with an unusually large seller note or a long earnout, that is what a buyer does when they are not confident the numbers will hold or that the business performs without the seller.
What this means for you
Three things you can check this week, before investing any money in professional support.
- Pull revenue by customer for last year, sorted from largest to smallest. Look at your top three as a percentage of the total. You do not have to do anything about it yet. You just need to know the number.
- Look at your trailing twelve months (TTM) of revenue. Are you trending in the right direction?
- Go through last year’s profit and loss statement and mark every expense that is personal rather than business. Each one is an add-back you will have to explain to a buyer. That list is where the cleanup starts.
If those three answers make you uncomfortable, that is the right reaction, and it is also the reason the runway is five years and not five months. Everything on it is fixable. None of it is fixable quickly.
Preparation is not valuation. A real valuation requires looking at your actual financials, your market, and your comparables, which is why it is the first step on the runway. Ultimately a business is only worth what someone is willing to pay and what the market will bear.
Next in this series: tax efficiency, and why most of the planning that affects what you keep has to happen before a letter of intent is signed.
If you want to walk through where your financials sit on that runway, Blue Sky offers a free consultation, and you can have that conversation years before you tell anyone else.
Sources
Every figure in this post traces to one of these. Nothing was estimated, rounded from memory, or inferred from a plausible range.
- https://exit-planning-institute.org/hubfs/25SOOR-Generational.pdf
Exit Planning Institute, 2025 Generational National State of Owner Readiness Report (published 2025, 1,162 owner responses): 75% of owners plan to exit within ten years; 13% of owners have a formal exit plan; 5% of Baby Boomers have formed a formal exit planning team; the business represents roughly 80% to 90% of the typical owner’s net worth. - https://www.bizbuysell.com/blog/2025-year-in-review/
BizBuySell, 2025 year-end data: 9,586 reported transactions, $350,000 median sale price, $703,000 median revenue, 94% average sale-to-asking-price ratio, 170 days median time to close. - https://www.garlandchamber.com/wp-content/uploads/2026/02/Market-Pulse-Q4-2025-Report.pdf
IBBA / M&A Source, Market Pulse Q4 2025: average multiples of 4.1x EBITDA for $2M–$5M and 5.5x EBITDA for $5M–$50M; sellers received 76% to 89% cash at close depending on deal size.
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