Business exit planning should start three to five years before you actually sell, not the year you decide you’re ready. John Shedenhelm’s team uses a simple gut check to see if an owner is starting late: can you take a two-week vacation without the business falling apart?
Why So Many Owners Wait Too Long
Most owners plan to sell someday, but very few plan for it early enough to matter. According to the Exit Planning Institute’s State of Owner Readiness research, roughly 51% of the current American business market is owned by Baby Boomers who are set to hand off ownership within the next ten years, yet only 20% to 30% of businesses that actually go to market end up selling. That leaves a large majority of owners without a real path to cash out.
The gap usually isn’t a bad business. It’s a business that was never made ready to sell.
The Two-Week Vacation Test
Here’s the test we ask every owner to try before we build an exit plan: leave for two full weeks, with no calls, no emails, and no checking in. If revenue holds steady, customers stay happy, and decisions still get made without you, your business has real transferable value. If everything depends on your daily presence, a buyer will see that immediately, and it will show up as a lower price or a deal that falls apart in due diligence.
Did You Know? Buyers and their advisors specifically look for “key person risk” during due diligence, and a business that can’t run without the owner often sells for a meaningfully lower multiple than a comparable business that can.
The Three Value Killers We Look For
Beyond the vacation test, three specific issues tend to kill deals or crush valuations during exit planning.
Customer concentration. If one or two customers make up a large share of revenue, buyers see that as fragile income that could disappear the moment ownership changes. Spreading revenue across more customers, even if total revenue stays flat, often increases what a buyer will pay.
Undocumented processes. If the way the business actually runs exists only in the owner’s head, a buyer has to trust that knowledge transfers cleanly, which it rarely does perfectly. Written procedures, even simple ones, reduce that perceived risk.
Messy financials. Buyers pay for verified profit, not claimed profit. Financial statements that mix personal and business expenses, lack consistent bookkeeping, or can’t be reconciled to tax returns create doubt that shows up directly in the final offer.
Pro Tip: Start keeping clean, separate financial records at least three years before you plan to sell. Most buyers and lenders want to see three years of consistent financials, and it’s nearly impossible to reconstruct that history convincingly after the fact.
Why the Three-to-Five-Year Window Matters
Fixing customer concentration, documenting processes, and cleaning up financials all take time. Replacing a key customer relationship, training a manager to run daily operations, or rebuilding three years of clean books can’t happen in a few months.
The three-to-five-year window also gives you time to address tax planning before a sale, since some of the most effective tax strategies for a business sale require setup years in advance rather than at closing.
What Exit Planning Actually Involves
A real exit plan covers more than just finding a buyer. It typically works through:
- A current valuation, so you know what the business is actually worth today, not what you assume it’s worth.
- An operational readiness review, using something like the two-week vacation test to find where the business depends too heavily on you.
- A personal financial plan, confirming how much you actually need from a sale to retire comfortably, since that number often differs from what owners assume.
- A tax and legal review, exploring structures that can reduce the tax bill on a future sale, which needs lead time to implement properly.
Did You Know? Many owners overestimate how much they need from a sale because they haven’t separated personal expenses from business expenses in their own planning, the same commingling issue that shows up in day-to-day financial planning for business owners.
Getting an Honest Valuation Early
Most owners have a number in their head for what the business is worth, usually based on a rough multiple of revenue they heard from another owner in their industry. That number is often wrong, sometimes by a wide margin in either direction.
A formal valuation, or even an informal broker’s opinion of value, gives you a realistic starting point years before a sale. It also highlights exactly which of the value drivers, customer concentration, documented processes, or clean financials, would move the number the most if addressed now. Without that early number, owners tend to either underprepare because they assume the business is worth more than it is, or delay a sale unnecessarily because they assume it’s worth less.
Pro Tip: Get a valuation refreshed every two to three years during the exit-planning window, not just once at the start. Watching how specific changes move the number is one of the clearest ways to see whether the work you’re doing is actually paying off.
Starting the Clock Now, Even If You’re Not Ready to Sell
You don’t need a firm sale date to start exit planning. In fact, starting before you’re sure you want to sell is exactly the point, since the changes that increase value also tend to make the business easier and more profitable to run in the meantime.
John Shedenhelm works with business-owning clients years ahead of a planned sale, coordinating the personal financial side with retirement plan design and the operational and tax review a sale eventually requires. The business solutions team at Eagle Financial Solutions helps bring in the right CPA and attorney at the right time in that process.
If you can’t yet answer the two-week vacation question with confidence, that’s useful information, not a failure. It just means the clock on your exit plan should have started already. Schedule a conversation with Eagle Financial Solutions to find out where your business stands today.
FAQ
When should you start exit planning for a business? Most advisors recommend starting exit planning three to five years before a planned sale. That timeline allows enough time to fix issues like customer concentration, undocumented processes, and inconsistent financials that reduce a business’s sale value.
What is exit planning in business? Exit planning is the process of preparing a business, and its owner, to eventually sell or hand off ownership. It includes a business valuation, operational readiness review, personal financial planning, and tax and legal strategy.
What reduces a business’s sale value the most? Heavy reliance on the owner, concentrated customer relationships, and inconsistent or commingled financial records are among the biggest factors that reduce a business’s sale value. Buyers see all three as added risk and price accordingly.
How many businesses that go up for sale actually sell? According to Exit Planning Institute research, only about 20% to 30% of businesses that go to market actually sell. Most of the rest lack the readiness that a multi-year exit plan is designed to build.
