If you own a business and you are looking to sell, one of the most common questions that comes up is — how do I know if my business is ready? And what are the seven things I should be looking at to make sure I am ready to go and can get the maximum multiple — the A plus deal? Hopefully you are taking a look five years, four years, three years, two years into the future and saying it is time to prepare. Here is exactly what to evaluate. Learn the full framework in Exit Ratio 360™ and at Exit Ratio 360™ — the 360-point evaluation system.
Question 1 — Can your team run the business for 30 days without you?
This is the first and most revealing readiness test. Can the team you have make enough decisions to run the business for 30 days and do it correctly? Do they have the skills, the decision bands, the authority to act? Start by eliminating owner dependency from the inside out — leave for a week, then two weeks, then three weeks, then a month. What you want is for your management team to have to answer to each other and to the business — not to you. See also: BENCH Framework.
How do you know if your business is ready to sell?
Your business is ready to sell when you can answer all seven questions cleanly: your team can run for 30 days without you, client concentration is below 15 percent in any single account, books close on a consistent monthly date, core processes are documented in SOPs, management has a verified track record of independent decisions, recurring revenue is above 40 percent, and a Titan Thesis assessment shows a buyer would pay a premium not a discount.
Question 2 — What does your client concentration look like?
The dependency of your revenue on certain clients, companies, or individuals is one of the first things buyers examine. The danger threshold is 15 to 20 percent maximum in any single account. Above that, buyers have to underwrite the risk of that client leaving after close. The higher the concentration the harder the deal becomes to justify at a premium multiple. Target 10 to 15 percent maximum per client. See also: Customer Concentration Risk.
What client concentration level is too high when selling a business?
Client concentration above 15 to 20 percent in any single account is dangerous for a business sale. If one client represents 50 percent of revenue, buyers have to underwrite the risk of that client leaving after close. Target 10 to 15 percent maximum per client where possible.
Question 3 — Are your financials closed on a consistent date every month?
If January ends, are the books closed by the 8th, 9th, or 10th of February? Consistent monthly close on a specific date is proof that you are paying attention to your numbers. It is proof that you know what is going on inside your business financially. This is a line in the sand — the consistent X-date close tied to a quality of earnings report is one of the most powerful signals of financial discipline a buyer can see.
Why does consistent monthly financial close matter to business buyers?
Consistent monthly close on a specific date is proof that you are paying attention to your numbers and know what is going on financially. It signals discipline to buyers and creates the foundation for a defensible quality of earnings history.
Question 4 — Do you have documented SOPs for every core revenue-generating process?
Apply the 80-20 rule — what are the eight out of ten processes that must be documented so that if a key person left, died, or was fired the business could continue? Those are the three reasons you will ever need an SOP — someone leaves, someone dies, someone gets fired. Documented SOPs are one of the most visible signals of operational readiness during due diligence.
What are the three reasons you need documented SOPs in your business?
The three reasons are: someone leaves, someone dies, someone gets fired. Apply the 80-20 rule: identify the eight out of ten core revenue-generating processes that must be documented and build those first.
Question 5 — Does your management team have a track record of independent decision-making?
This comes back to the vacation test. Take a week away. Then two weeks. Then three. What breaks? What decisions get made correctly without you? Mentoring your management team to make decisions the way you would — teaching them how you think — is one of the most overlooked paths to a maximum multiple. Document this track record in your Titan Thesis with specific examples.
How long does it take to prepare a business for sale?
You can prepare in six months — but you do not want to. The 5-4-3-2 Exit Planning Framework recommends five years, four years, three years, two years of preparation. Every additional year gives you more time to build track record, fix gaps, and recover from mistakes before buyers find them.
Question 6 — Is your recurring revenue percentage above 40 percent?
Do you have contracts? Do you have monthly recurring revenue? Do you have proof that money is coming back? Revenue without proof of recurrence is something buyers discount heavily. A buyer who sees signed contracts and documented recurring revenue history sees a predictable future cash flow — which is what they are actually purchasing. See also: 5-4-3-2 Exit Planning Framework.
What recurring revenue percentage makes a business more attractive to buyers?
Above 40 percent recurring revenue is a meaningful signal of business quality. Buyers see predictable future cash flow — which is what they are actually purchasing. Signed contracts and documented recurring revenue history give buyers confidence that the revenue will continue under new ownership.
Question 7 — Would a buyer pay a premium for this business or a discount — and why?
This is the Titan Thesis question. Ask yourself honestly — based on what a buyer would find during due diligence, would they justify paying above market or below market for this business? The answer reveals every gap that still needs to be addressed. Every additional year of preparation gives you more time to get it right and more runway to recover from mistakes before buyers find them.
Would a buyer pay a premium for your business or a discount?
The Titan Thesis question. Ask yourself honestly — based on what a buyer would find during due diligence, would they justify paying above market or below market? The answer reveals every gap that still needs to be addressed. Your business should command every cent it deserves — and the Titan Thesis is the proof document that makes that case.
Full Video Transcript
If you own a business and you’re looking to sell, one of the most common questions that comes up is, how do I know if my business is ready to sell? And what are the seven things that I should be looking at to make sure that I’m ready to go and I get the maximum multiple or that A plus deal? I’m Scott Sylvan Bell coming to you live from Haleiwa, Oahu, one of my favorite places on earth.
All right, so you’re on this path, you want to sell. Hopefully you’re taking a look five years, four years, three years, two years into the future, and saying hey, I think it’s time for me to prepare my business to sell. One of the first and easiest things to take a look at is — can you step away from the business for 30 days? Can the team that you have make enough decisions to run that business for 30 days and do it right? Do they have the decision bands? That’s one of the first places to start. You can leave for a week, then two weeks, then three weeks, stage this. Eventually get to a month, then two months, then three months. What you want is for your team to see you step away — and for them to have to answer to managers, to come to questions, and not you. You don’t want owner dependency.
Number two — what is your revenue like when it comes from your clients? The dependency upon certain companies or individuals to bring you money is dangerous if it’s above 15, 20, 30 percent. If you’ve got 10 clients and one of them is 50 percent of the business — that’s dangerous. Where possible, depending on your industry, 10 to 15 percent is the max you’re looking for.
Number three — are the financials closed on a set date? If January is over, are the books closed by the 8th, 9th, or 10th of February? Consistent X-date closing is proof that you’re maintaining your books. Number four — do you have documented SOPs for every core revenue-generating process? If you can find the 80-20 rule — what are the eight out of ten things you have to have so that if somebody left, died, or got fired, you’re covered?
Number five — does your management team have a track record of independent decision-making? Mentorship of management is one of the things that’s overlooked that helps you get to that maximum multiple. Number six — is your recurring revenue percentage above 40%? Do you have contracts? Do you have proof that that money is going to be back? And number seven — would a buyer pay a premium for this business or give you a discount? My belief is it’s your business. You should get every cent out of it that you can. Preparing five years, four years, three years, two years out where possible gives you maximum advantage to get the maximum multiple. Aloha. Mahalo.
Related: Key Person Dependency | Customer Concentration Risk | 5-4-3-2 Framework | Titan Thesis | BENCH Framework | Exit Ratio 360™ | Exit Ratio 360™ on Amazon
About Scott Sylvan Bell
Scott Sylvan Bell is a mid-market exit strategy consultant and the creator of the Exit Ratio 360™. He filmed this video in Haleiwa, Oahu. His book is available on Amazon.