I recently read an article from Axial about the “1,000 Day Exit Plan.” The premise is simple: if you think you may sell your company someday, the time to start preparing isn’t six months before you want to go to market. It is closer to three years.
After nearly 40 transactions involving technology service providers, I think they have the timing about right. In fact, when I sold my last company, I spent almost exactly three years preparing it for a sale. But I would spend those 1,000 days a little differently now.
When an MSP, VAR, or other technology service provider comes to us ready to sell, we can usually identify several things I wish the owner had addressed two or three years earlier. Sometimes they are relatively minor. Other times they can have a meaningful impact on valuation, deal structure, or even whether a buyer is willing to proceed. Many of these issues can be fixed, but some simply require time.
Start With the Number Buyers Will Actually Believe
Most business owners know their EBITDA. The more important question is whether a buyer will believe it. There can be a substantial difference between the EBITDA shown on a company’s internal financial statements and the Adjusted EBITDA a buyer ultimately accepts.
Owner compensation, personal expenses, family members on payroll, one-time expenses and other legitimate adjustments may all increase Adjusted EBITDA. But buyers and their Quality of Earnings providers are going to want evidence supporting those adjustments.
When I prepared my own company for sale, one thing I was very conscious of was avoiding dramatic changes in margins or net income percentages immediately before going to market. I wanted the numbers to improve, but I wanted them to improve in a way that was sustainable and believable.
Think about it from a buyer’s perspective. If gross margins have been 40% for years and suddenly jump to 50% six months before the company goes to market, the obvious question is: What changed? The same thing happens if Adjusted EBITDA suddenly increases because a seller eliminated a significant amount of expense shortly before a sale. The change may be completely legitimate, but the timing can make a buyer skeptical about whether the improvement is sustainable.
That’s another reason the 1,000 days matter. If you change the way you operate the business two or three years before a sale and the financial results reflect that change consistently, buyers have history to support it. It is no longer something you did to prepare for a transaction. It is simply the way you run the business.
That doesn’t mean you shouldn’t make changes as you get closer to a sale, and legitimate normalization adjustments will always be part of calculating Adjusted EBITDA. But whenever possible, don’t wait until two months, six months, or even a year before selling to make major changes that could have been made earlier. The longer the financial history supports an improvement, the more credible that improvement becomes.
Use those three years to improve the quality and consistency of your financial reporting as well. Clean up the chart of accounts, separate personal and business expenses, make sure revenue and expenses are being recognized consistently, and document legitimate adjustments as they occur instead of trying to recreate them years later.
Remember, every $100,000 of sustainable EBITDA can represent substantially more than $100,000 of enterprise value when a buyer applies a multiple to earnings.
Improve the Quality of Your Revenue
I hear owners say all the time, “Almost all of our revenue is recurring.” Maybe, but a buyer may define recurring revenue very differently.
A customer who has purchased from you every year for ten years is certainly a great customer. That doesn’t necessarily make the revenue contracted recurring revenue.
For an MSP, buyers are going to look closely at managed services agreements, contract length, renewal provisions, customer retention, gross margin, pricing, and customer concentration. For a VAR, the analysis can be more complicated. Product sales may recur year after year, but buyers will typically place greater value on revenue that is contractual or highly predictable, such as managed services, support, maintenance, and cloud services.
The 1,000-day window gives you time to intentionally improve that mix. It also gives you time to address customer concentration. If one customer represents 25% of your revenue, there isn’t much you can do about it 90 days before going to market. Three years earlier, however, you have an opportunity to grow around that customer and reduce the risk.
Make Yourself Less Important
This one can be difficult for entrepreneurs because many of us built our companies by being involved in everything. We knew the customers, approved expenditures, helped close large deals, and knew what was happening with employees. If something went wrong, everyone knew who to call.
That may work extremely well while you’re building a business, but it isn’t necessarily what a buyer wants to acquire. A buyer wants to know that the company will continue performing after you leave. If most customer relationships, sales activity, and operational decisions still run through the owner, the buyer sees risk.
Use those 1,000 days to transfer customer relationships to other people, build a management team, develop processes, and give key employees real responsibility. Ideally, by the time you sell, you should still be important to the company, but the company shouldn’t be dependent upon you.
Find the Land Mines Before the Buyer Does
I have yet to work on a transaction where we didn’t discover something that required attention. It might be sales tax, an unusual customer contract, deferred revenue, aging accounts receivable, employee classification, intellectual property, change-of-control provisions, cybersecurity, or an accounting practice that has been followed for years but won’t survive a Quality of Earnings review.
None of this necessarily means you have a bad company. It means you have a company. But there is an enormous difference between identifying an issue two years before a transaction and having a buyer identify it during diligence.
Once you’re under LOI, the buyer has leverage, and your negotiating position generally does not improve when the buyer discovers something unexpected. Find the problems early, determine which ones matter, fix the ones you can, and quantify the ones you can’t.
Don’t Spend Three Years Trying to Build the Perfect Company
Your company does not have to be perfect to sell. I’ve seen owners spend enormous amounts of time fixing things that ultimately had almost no impact on valuation, while ignoring a customer concentration issue, weak management position, or financial reporting problem that mattered tremendously to buyers.
The objective isn’t perfection. It is understanding what a buyer is likely to value and what a buyer is likely to perceive as risk.
That was one of the reasons I wrote Get Acquired for Millions. There is a big difference between building a successful company and building a company positioned to maximize value in a sale. If you have 1,000 days, concentrate on the things that can actually move the needle.
Figure Out What You Want Before Someone Makes You an Offer
Exit planning isn’t only about enterprise value. How much cash do you need at closing? Are you willing to roll equity into the buyer? Would you accept an earnout? How long are you willing to remain with the company? What happens to your employees? Would you rather sell to a private equity-backed platform or a strategic buyer? And what do you want your life to look like after the transaction?
These questions become much harder to answer when there is a multimillion-dollar LOI sitting in your inbox. They can also affect how your company should be positioned and marketed. A seller who wants to walk away shortly after closing may require a very different buyer than an owner who wants to roll a meaningful portion of the proceeds and participate in a second bite of the apple.
Know what a successful transaction looks like for you before the offers arrive.
You Don’t Need an M&A Advisor for 1,000 Days
I don’t think you need to hire an M&A advisor three years before you sell. In fact, you probably shouldn’t. But I do think it’s worth having a conversation with one.
A good sell-side advisor who understands your industry should be able to tell you what buyers are currently paying attention to, where your company is likely to fall in the valuation range and, more importantly, what is keeping it from being worth more.
If I were 1,000 days from selling, I would ask one question: What are the three things I could change over the next three years that would have the greatest impact on the value of my company? Then I’d spend my time there.
Around 12 to 18 months before your anticipated sale, the planning should become much more transaction-specific. That’s when I would start thinking seriously about advisor selection, tax planning, transaction structure and whether a sell-side Quality of Earnings analysis makes sense. By the time you’re 200 days from going to market, you shouldn’t be trying to fundamentally change the business. You should be preparing to present the business you’ve built.
1,000 Days Is Really About Optionality
One statistic from Axial’s research caught my attention. In a survey of investment bankers, 66% said that fewer than one in four sellers approaching them were properly prepared for a transaction. That doesn’t surprise me.
Most business owners don’t spend their days thinking about selling their companies. They’re thinking about customers, employees, sales, margins, and the hundred other things that come with running a business. Then one day they decide they’re ready to sell. Unfortunately, the business may not be ready just because the owner is.
Maybe you’re 1,000 days from selling. Maybe you’re 2,000 days away. Maybe you have absolutely no idea when you’ll sell. That’s okay. Preparing your MSP or VAR for a future buyer doesn’t mean you’ve decided to sell it. It means you’re building a more valuable, less risky, and less owner-dependent company.
And when the day eventually comes that you decide you’re ready, you won’t just have a better-prepared business. You’ll have something equally important: choices.
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