Getting a business ready for sale: the two-year runway
Buyers pay for a business that runs without its owner and whose numbers need no explaining. Both take longer to build than most owners expect.
Photo by Zoshua Colah on Unsplash
Getting a business ready for sale is mostly work that happens long before a buyer appears. Buyers pay for two things above all: a business that runs without its owner, and financial records that need no explaining. Neither can be produced in a few months.
The Business Development Bank of Canada (BDC) recommends that owners begin preparing at least five years before retirement to put value-building steps in place. Its guide to succession planning sets a floor of 18 to 24 months before the desired exit. Two years is the shortest runway that works well. Here is how to use it.
Why a business ready for sale needs two years
The main constraint is the financial record. BDC notes that potential buyers typically want to track the financial performance of a business over at least the previous three years. Any improvement you make today, whether a cost removed or a pricing change, needs time to appear in a full year of results. A buyer will discount improvements that exist only in the last few months.
The second constraint is people. Handing customer relationships and decisions to a management team is slow, and buyers will want to see it working, not promised.
Two years out: the records
Start with the numbers a buyer will read.
Upgrade the financial statements. BDC suggests three years of financial reports prepared under a review engagement by a Chartered Professional Accountant (CPA). If your statements are currently prepared on a lighter basis, change that now.
Separate the owner from the business. BDC advises keeping a lid on operating costs and avoiding unnecessary expenses, especially those linked to the owner’s lifestyle. Personal vehicles, family members on payroll who do not work in the business, and similar items all have to be explained and adjusted during due diligence. It is better to remove them.
Tidy the corporate record. Minute books, share registers, shareholder agreements and permits should be current. Gaps found by a buyer’s lawyer slow a deal and erode trust.
Plan the tax. The lifetime capital gains exemption applies to up to $1.25 million of eligible capital gains on dispositions on or after 25 June 2024. Whether a sale qualifies depends on how the business is structured, and some planning has to be done well before a sale. Ask your accountant early.
Eighteen months out: make yourself replaceable
Reliance on the owner is one of the most common barriers to a sale. The Canadian Federation of Independent Business (CFIB) found that 39% of owners planning to exit say their business is too reliant on them for day-to-day operations.
BDC puts it directly: prospective buyers cannot buy you, they are buying your operations. Use this period to:
- appoint or develop managers who make day-to-day decisions without you;
- introduce those managers to your key customers and suppliers, and let them own the relationships;
- write down how the business runs: pricing, quoting, purchasing, hiring and the other processes that live in your head;
- consider retention arrangements for the staff a buyer will most want to keep.
Then step back. BDC suggests that owners consider stepping down as chief executive years before retirement, so a successor has time to show what they can do. Even six months of the business running under someone else’s day-to-day direction gives a buyer evidence rather than a promise. It also tells you, before a buyer finds out, where the gaps still are.
Prospective buyers cannot buy you. They are buying your operations.
Twelve months out: value and contracts
Get a professional view of value. BDC recommends a chartered business valuator for an objective and realistic understanding of your company’s value, or to judge whether a buyer’s offer is reasonable. Valuators use earnings-based, market-based and asset-based methods. Market methods often apply a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) or of revenue. BDC also cautions that a valuator’s figure is a guideline, and that the final price depends on the market and the buyer.
A valuation a year out leaves time to act on what it shows. If the gap between the value and your expectations is large, you can still improve the business or adjust the timing.
Check the contracts. Buyers will ask whether key contracts can be transferred to them. Read your lease, major customer agreements, supplier contracts and licences for change-of-control and assignment clauses. Renew a short lease, or negotiate an option to extend, before you go to market.
Six months out to sale: buyers and confidentiality
With the business prepared, the search for a buyer can begin. BDC describes several kinds of buyer: strategic buyers in your industry, financial partners, your own management team and the next generation of your family. Each values different things, so decide early which you want to approach.
Protect confidentiality throughout. BDC advises using non-disclosure agreements with every potential buyer before sharing sensitive information, and warns against creating a panic among customers and suppliers who learn you are for sale before you have told them. Decide in advance when and how you will tell your staff.
For larger businesses, BDC suggests hiring a mergers and acquisitions adviser to run the sale process. For smaller ones, a well-organized information package and a clear process still make a large difference.
A practical first step
Count back two years from the date you would like to sell, and put the steps above into a calendar. If that start date has already passed, the runway is shorter than it should be. That is a reason to start this month, not to rush the sale.
Our earlier note on business succession options compares the main routes to an exit. Our business succession planning page explains how we help owners prepare, alongside their accountant, lawyer and a licensed valuator.
Sources
- “How to plan your exit from your business”, Business Development Bank of Canada. https://www.bdc.ca/en/articles-tools/change-ownership/plan-succession/thinking-about-retiring-how-plan-your-exit
- “Budget 2025 Implementation Act, No. 1 (S.C. 2026, c. 3)”, Justice Laws Website, Government of Canada. https://laws.justice.gc.ca/eng/AnnualStatutes/2026_3/page-1.html
- “Over $2 trillion in business assets are at stake as majority of small business owners plan to exit their business over the next decade”, Canadian Federation of Independent Business, 10 January 2023. https://www.cfib-fcei.ca/en/media/over-2-trillion-in-business-assets-are-at-stake-as-majority-of-small-business-owners-plan-to-exit-their-business-over-the-next-decade
- “Business valuation: What’s your company worth?”, Business Development Bank of Canada. https://www.bdc.ca/en/articles-tools/change-ownership/sell-business/business-valuation-whats-your-company-worth
- “Finding the right buyer when you sell your business”, Business Development Bank of Canada. https://www.bdc.ca/en/articles-tools/change-ownership/sell-business/how-find-right-buyer-for-your-business
- “How to create a succession plan”, Business Development Bank of Canada. https://www.bdc.ca/en/articles-tools/change-ownership/plan-succession/3-common-exit-strategies
