Most business owners get one shot at their exit. One. Here’s how to make sure the number you sign for is the number you keep.
Sold and bought over $250 million in businesses. Deals from $1.5 million to $45 million. Book the $1,000 Cup of Coffee
You built this thing. Nights, weekends, payroll you covered out of your own account more than once.
And one day you’re going to hand it to somebody else.
Here’s the uncomfortable truth. Most owners spend thirty years building a company and ninety days selling it. They negotiate the price and let a stranger’s lawyer write everything else. Then they find out what the deal actually cost them after the wire hits.
That’s what exit planning is for.
Exit Planning Is Not the Same as Selling
Selling starts when you decide to sell. Exit planning starts years earlier, and it’s the reason there’s anything worth selling when you get there.
Selling is a transaction. Exit planning is the work that determines what that transaction is worth.
Here’s the difference in one sentence. Your broker negotiates the price. Your lawyer determines the proceeds.
Those are not the same number. They’re not close.
The gap between them is deal structure, purchase price allocation, escrow, holdbacks, indemnification, earnout language, and tax. Every one of those is a legal instrument. Not one of them shows up in the price you brag about at the country club.
Could Your Business Run for 90 Days Without You?
Answer honestly. Not how you wish it were. How it actually is.
If the answer is no, you don’t have a business. You have a job that you can’t quit and can’t sell.
I wrote a book about this. It’s called The Business Owner’s Escape Plan, and it exists because I kept watching the same thing happen. Owner walks in at 62, ready to retire. Good company. Real revenue. Real profit.
And no buyer will pay a premium, because the business is him.
What Owner Dependency Actually Costs You
Let me show you two owners. Same industry. Same city.
Owner One works 60 hours a week. Can’t take a vacation. Answers the phone at dinner. Makes about $150,000 a year. If he sold tomorrow he’d get maybe 2x cash flow, if he’s lucky.
Owner Two works 20 hours a week. Takes six weeks off a year. Phone doesn’t ring after 5. Makes $400,000 a year. Could sell tomorrow for 10x cash flow.
Same industry. Different results.
Run that math on your own company. On a business throwing off $500,000 a year, the difference between 2x and 10x is four million dollars. That’s not a rounding error. That’s the difference between the retirement you planned and the one you settle for.
And it’s not decided at closing. It’s decided over the three years before you ever call a broker.
How a Buyer Tests for It
A buyer will never ask “are you the business?” He’ll ask questions that find out.
- Who signs the contracts, and does the customer care?
- What happens to your top five accounts if you’re not there?
- Is there anybody who can quote a job without asking you?
- How much of last year’s revenue came from relationships you personally own?
- Show me your documented processes.
That last one ends more deals than any other. When the answer is “it’s all in my head,” what the buyer hears is: I’m not buying a company. I’m buying a person, and he’s leaving.
The Six Systems
The fix isn’t complicated. It’s just work, and it takes time, which is why you start early.
Six systems separate a business that sells at a premium from one that doesn’t:
- The Client Attraction System. Leads come from a process, not from you working the room.
- The Client Engagement System. Prospects become customers the same way every time, whether or not you’re in the meeting.
- The Client Service System. The work gets delivered to the same standard without you doing it.
- The Client Retention System. One-time buyers become recurring revenue, which is the revenue buyers pay the most for.
- The Team Accountability System. Your people perform when you’re not watching.
- The Math of Management. You know your numbers weekly, not at tax time. You can’t sell what you can’t prove is profitable.
Every one of those raises your multiple. Every one of them also gives you your life back years before you sell, which is the part most owners don’t expect.
Not sure where you stand? Take the 60-Second Business Freedom Assessment. Seven questions. It’ll tell you what a buyer would see.
When to Start
Everybody says three to five years. That’s right, and it’s useless, because nobody tells you what has to be true at each mark.
Three years out
Fix owner dependency. Clean up the books so a buyer’s accountant can follow them. Get your contracts in writing, including the handshake deals with your biggest customers. Look at your entity structure now, because changing it later can cost you the tax treatment you wanted.
Twelve months out
Nail down customer concentration. Get key employees under agreements that survive a change of control. Resolve the litigation, the lien, the lease that’s month to month. Every unresolved item becomes a discount or an escrow.
Ninety days out
Now you’re negotiating, and by now most of the important things are already decided. The letter of intent will lock in more than you think, and it usually gets signed before anybody calls a lawyer. That’s backwards.
Call me before you sign the LOI. Not after.
What a Buyer Is Actually Looking For
Quality of earnings
Your P&L says one thing. A buyer’s quality-of-earnings analysis says another. Add-backs you think are obvious get challenged. Your truck, your wife on payroll, the family cell plan, the Cabo trip you called a sales conference. Some of those survive. Some don’t. The ones that don’t come straight out of your multiple.
Customer concentration
If one customer is 40% of revenue, you don’t have a valuation problem, you have a structure problem. That deal will come with an earnout tied to whether that customer stays, and now you’re a minority partner in your own retirement.
Contracts that don’t survive
Half the value in a lot of companies sits in agreements with change-of-control clauses, anti-assignment language, or landlord consents nobody’s read since 2011. A buyer’s lawyer reads all of them. Yours should read them first.
Your Three Exit Paths
Third-party sale
Highest price, most diligence, most structure. A strategic buyer pays for what your company does for his company. A private-equity-backed buyer pays for cash flow and management depth. An individual buyer pays what the bank will lend him. Three different buyers, three different numbers for the same business.
Family succession
Lowest price, highest emotional cost, and the one people get wrong most often. The question isn’t whether your kid can run it. It’s whether your other kids will accept the deal, whether the buyout is funded, and whether you can afford to retire on it.
Management buyout or ESOP
Your people know the business, which shortens diligence. They usually don’t have the money, which means you’re the bank. Seller financing turns your exit into a five-year bet on people you trained. Sometimes that’s the right bet. Structure it like it might not be.
What You Actually Keep
Nobody covers that part, and it’s where the money is won or lost.
Asset sale or stock sale
A buyer wants an asset sale, because he gets a stepped-up basis and leaves your old liabilities behind. You usually want a stock sale, because it’s cleaner and often better on tax. That tension gets resolved in the purchase agreement, and whoever understands it better wins it.
I once had a deal come to me structured in a way that would have killed the step-up in basis. It looked fine. Everybody had signed off. That structure would have cost the seller over $700,000 in tax. I caught it before we signed.
Purchase price allocation
In an asset deal, the price gets allocated across equipment, inventory, goodwill, and your non-compete. Every line is taxed differently. Goodwill is capital gain. A payment for your non-compete is ordinary income. Move a few hundred thousand across those lines and you’ve changed what you keep by six figures, and the buyer often doesn’t care which way it goes.
If nobody at your table is fighting over the allocation schedule, nobody at your table is working for you.
Texas tax
Texas has no state income tax. That’s real money for a seller here compared to California or New York, and it’s one reason out-of-state buyers like Texas deals.
It also means the split between capital gain and ordinary income in your allocation is the whole game. There’s no state layer blurring it. What you keep is decided federally, by a schedule attached to your purchase agreement.
What Happens After Closing
You signed. The money moved. You are not done.
Earnouts and seller notes
An earnout means part of your price depends on how well the buyer runs the company you just handed him. Tied to revenue, it’s a fight. Tied to EBITDA, it’s a bigger fight, because now he controls the expense line. If you take an earnout, the definition section matters more than the number.
Escrow, holdbacks, indemnification
A slice of your price sits in escrow for a year or two against claims. How big, how long, what triggers it, whether there’s a cap and a basket, and how long your representations survive. These get negotiated in one afternoon and they determine whether you actually got paid.
Your non-compete
You will sign one. The question is how wide, how long, and how far.
A non-compete signed when you sell a business is treated very differently in Texas than one signed by an employee. It’s ancillary to the transfer of goodwill, and courts have enforced business-sale covenants far more readily, including long periods that would never survive in an employment context.
Which cuts both ways. It protects the value you sold. It also means the scope you agree to is likely the scope you live with.
Transition and consulting agreements
Most buyers want you around for 3 to 12 months. That’s reasonable. What’s not reasonable is an open-ended commitment with no hours cap and no defined scope, which is how “just be available for questions” becomes a part-time job you’re not paid for.
Selling a Government-Contracting Business in San Antonio
Joint Base San Antonio anchors a large part of this economy, and a lot of good companies here have federal contracts.
You cannot simply sell those contracts. Transferring them requires government consent through novation, and that process, not your tax preference, often dictates whether the deal is structured as an asset sale or a stock sale. An owner who follows the generic “asset sales are better for sellers” advice can kill his own transaction.
Add security clearances, DCAA audit history, and the reality that a buyer is diligencing your compliance record as hard as your financials. I’ve sold a janitorial government-contracting business. It is not like selling a landscaping company.
Attorney, Broker, or CPA
You’ll probably use all three. They do different jobs and they get paid differently, and you should understand that before you take anyone’s advice.
A broker finds buyers and runs the process. He’s paid a success fee at closing. That’s a fine incentive for getting a deal done. It’s a poor one for telling you don’t sell yet, or this LOI is bad, or walk away.
A CPA tells you what the numbers were and what the tax will be. He’s looking at last year. He usually isn’t drafting the document that creates this year’s tax.
An attorney gets paid whether you close or not. Which means I can tell you the deal is bad. I’ve told people that. Some of them didn’t want to hear it. A couple of them thanked me two years later.
Your buyer’s lawyer is looking out for your buyer. Somebody has to be reading the structure for what it does to YOU the day after closing.
What Clients Have Said
“…his work held up well when I merged my company into a much larger firm two years later. The documentation was clear, the facts were all in their right places and the merger was as easy as mergers can be.”
Larry Ogden, Employee Benefits and Mental Healthcare Entrepreneur · April 2010
“Having worked with dozens of attorneys over a 30 year career, from IP, Tax and Media to Labor, Employment and Anti-Trust, Jim is one of the most value-added legal resources I’ve had the pleasure to work with. … In the event you are exploring a buy or sell proposition, looking to raise capital, are confronted with some pressing legal challenges or simply want to improve your bottom line, I would highly recommend contacting Jim your first priority when looking for legal counsel.”
Jack Terrazas, CEO and Co-Founder, DrySafer Corp. Inc. · February 2012
Published publicly by their authors on LinkedIn, where they can be verified. Past results do not guarantee a similar outcome in any other matter.
Selected Transactions
Over $250 million bought and sold. Deals from $1.5 million to $45 million. PE-backed buyers, strategic buyers, and individuals writing their own checks.
Point of sale systems company, over $45 million · Merger of audio visual companies · Purchase of multiple copier and printer businesses · Sale of a pharmaceutical company · Sale of a specialized metals manufacturer · Sale of a psychology testing company · Sale of a dental practice · Sale of a janitorial government contracting business · Sale of a health insurance brokerage · Merger of engineering firms · Sale of a business valuation company · Sale of multiple fitness franchises · Restructuring of tree maintenance companies · Purchase of landscaping companies · Restructure of a laser manufacturing company · Purchase of an electrical contractor · Sale of a cast surround company
Frequently Asked Questions
What is business exit planning?
It’s the work you do in the years before a sale to make sure the business is worth buying and the deal is structured so you keep what you sell it for. Selling is the transaction. Exit planning is everything that determines what that transaction is worth.
When should I start exit planning?
Three to five years before you want out. If that sounds early, it’s because the things that raise your multiple, reducing owner dependency, cleaning up the books, getting contracts in writing, all take a couple of years to show up in the numbers a buyer will pay for.
Do I need an exit plan if I’m not selling for ten years?
Especially then. Ten years out you have time to fix everything. Ninety days out you have time to fix nothing.
Do I need a lawyer to sell my business?
You need someone drafting and reading the purchase agreement whose only job is you. A broker can’t draft it. A CPA won’t. The buyer’s lawyer isn’t working for you.
Exit planning advisor, business broker, or attorney: what’s the difference?
A broker markets the business and finds buyers, paid on closing. An exit planning advisor works on readiness and value. An attorney structures the transaction and drafts the documents that decide what you keep, and gets paid whether or not the deal closes.
What is my business worth?
A multiple of cash flow, and the multiple depends mostly on how much the business depends on you. Same profit, same industry, and the range runs from about 2x to 10x depending on whether a buyer is purchasing a company or purchasing you.
How long does it take to sell a business?
Usually the better part of a year from listing to closing, and longer for smaller deals. That’s after the years of preparation that make it sellable.
Asset sale or stock sale, which is better for me?
Usually a stock sale, for tax and for cleanliness. Your buyer will usually want an asset sale for the step-up in basis and to leave your liabilities behind. It gets resolved in negotiation, and it’s worth real money.
How do I reduce capital gains tax when I sell in Texas?
Texas has no state income tax, so it’s a federal question, and it’s decided largely by how the purchase price is allocated in the agreement and how the entity is structured going in. Both are decisions made before closing, not at tax time.
Should I agree to an earnout?
Sometimes. Just understand you’re taking part of your price in exchange for a bet on how somebody else runs your company. If you do it, the definitions matter more than the number.
Are non-competes enforceable in Texas when you sell a business?
A non-compete given as part of selling a business is treated much more favorably than one signed by an employee, because it’s tied to the goodwill you sold. Expect to sign one, and expect it to hold.
What happens to my employees when I sell?
Depends on the structure. In a stock sale they usually stay employed by the same company. In an asset sale the buyer typically re-hires who he wants, which means people you promised things to may not get them unless the agreement says so.
Can I sell my business without a broker?
Yes, particularly if a buyer already found you, which happens more than people think. You still need the documents done properly. That’s the part where a bad afternoon costs more than a broker’s whole fee.
What if my business isn’t ready to sell?
Then you have time, which is the good news. Take the assessment, find the two or three things holding down your multiple, and fix them. That’s the whole point of planning an exit instead of just having one.
Already past planning and into the deal itself? Read How to Sell a Business in Texas, a step-by-step walk through the whole process from letter of intent to escrow release.
There is a part of this nobody puts on a checklist. Read Letting Go of the Business You Built for the five ways an owner’s attachment to his own company costs him money at the closing table.
The practical version of all of it, system by system, is in How to Make Yourself Replaceable, along with a three-year plan for getting out of the middle of your own company.
One Hour. One Price.
Sixty minutes on the phone. Just you and me, talking about your business.
I’ll ask you questions nobody else asks. I’ll show you where you’re leaving money on the table. I’ll tell you which of the six systems to fix first, and lay out how you get from where you are now to where you want to be.
It costs $1,000.
Most business owners get one shot at their exit. One. The cheapest hour you’ll spend on it.