Exit planning starts with the numbers, 12 to 24 months out

Exit planning, on the financial side, is the work an owner does before a sale so that the books, earnings, working capital and reporting hold up when a buyer tests them. Done 12 to 24 months ahead, it turns diligence from a series of surprises into a confirmation of numbers the seller already understands.

The diligence step itself, where adjusted EBITDA is tested line by line, is covered in the guide to quality of earnings and EBITDA adjustments. This post steps back to the planning window before that: what to fix, in what order, and why each item matters to a buyer.

What exit planning covers

Exit planning has a personal side and a business side. The personal side (timing, tax, what the owner does next) belongs with a lawyer, a tax advisor and often a wealth advisor. The SBA also suggests involving a business valuation expert, accountants and bankers in the process.

The financial side is the part a buyer will examine directly:

• Books that close monthly on an accrual basis, on time, without large year-end corrections.
• Earnings that are documented and repeatable, with a supported schedule of adjustments.
• Working capital history by month, so the target level for the deal can be set from real data.
• Revenue quality: who the customers are, how concentrated revenue is, and how much recurs.
• Reporting and forecasts that show the business is run on numbers, not on the owner's memory.

A timeline from 24 months to closing

The table shows one way to sequence the work. The exact months matter less than the order: fix the books first, then build the track record, then package it.

Illustrative timeline, not a fixed rule.

The first block is often the longest. Books kept on a cash basis, or closed only at year end, have to be restated and then run correctly for long enough that a buyer sees a clean history rather than a recent fix.

What buyers test, and how to prepare each item

Earnings. Buyers want to know how much profit a new owner will actually get. That means a schedule of adjustments (owner pay at market rates, personal expenses, genuinely one-time items) where every line ties to the ledger and has support. Adjustments that only ever increase earnings, or "one-time" costs that recur, are the first to be cut.

Working capital. Most deals set a target level of working capital the business must deliver at closing, and adjust the price for any shortfall or excess. Twelve to twenty-four months of monthly history lets the seller argue for a fair target. The mechanics are covered in the post on the working capital peg.

Revenue quality. A few customers carrying most of the revenue, contracts that are not written down, or revenue that depends on the owner's personal relationships all increase risk in a buyer's eyes. Some of these take a year or more to change, which is why planning starts early.

Owner dependence. If the owner approves every payment, holds every key relationship and is the only person who understands the numbers, a buyer has to price in what happens when the owner leaves. Delegating approvals and documenting the finance routine reduces that risk.

Forecast. Buyers compare the forecast with recent performance. A forecast that has tracked actuals for a year carries far more weight than one built for the sale.

How valuation approaches work

The SBA describes three common valuation methods:

• Income approach: looks at projected revenue and accounts for risk.
• Market approach: compares the business with similar businesses that recently sold.
• Assets approach: subtracts total liabilities from the total value of all assets.

For most operating businesses, the income and market approaches dominate, and both depend on earnings the buyer believes. That is why so much of exit planning comes back to the quality of the numbers rather than the headline growth story.

Plan the tax side early

Structure changes what the seller keeps. The IRS treats the sale of a business for a lump sum as a sale of each individual asset, and buyer and seller must allocate the price across those assets using the residual method. That allocation determines the gain or loss on each asset and how much of the price counts as goodwill. Whether the deal is an asset sale or a sale of shares, and how the price is allocated, are questions for the tax advisor well before a letter of intent, not after.

Common mistakes

• Starting at the letter of intent. By then there is no time to build a clean history, so problems are priced in.
• Cash-basis or year-end-only books. Restating under pressure delays diligence and undermines trust.
• An adjustment schedule without support. Every add-back a buyer cannot verify is likely to be removed.
• Ignoring working capital. A seller who does not know their normal level can lose value at closing.
• Changing many things at once right before a sale. New systems, new pricing or a big reorganization in the final months make the recent numbers harder to read.

Exit planning is mostly the same discipline a well-run finance function practices anyway: monthly closes, honest reporting and a forecast that tracks reality. Starting early simply gives a seller time to show that record. The sale itself, from pricing and the letter of intent to closing, is covered in the guide to selling a business.