Exit Planning & Seller Preparation Flashcards

When should a business owner ideally begin exit planning before selling their business?

Answer: 3-5 years before the intended sale

Exit planning experts recommend starting 3-5 years before the intended sale to allow sufficient time to improve financials, reduce dependencies, and systematically maximize business value.

What does 'Seller's Discretionary Earnings' (SDE) measure in the context of exit planning?

Answer: The total economic benefit a single owner-operator derives from the business

SDE measures the total financial benefit flowing to an owner-operator, including salary, perks, and net income, and is the primary metric used to value small businesses.

Which action BEST improves a business's transferability and value before a sale?

Answer: Documenting standard operating procedures and creating training manuals

Documented SOPs and training manuals create a transferable, scalable business that reduces buyer risk and signals the business can operate without the current owner.

What is the primary purpose of a business readiness assessment conducted before listing?

Answer: To identify weaknesses that should be addressed before bringing the business to market

A readiness assessment identifies operational, financial, and legal gaps that could reduce value or derail a sale if left unaddressed before the business is listed.

A business that generates 75% of its revenue from a single customer is said to have what issue?

Answer: Customer concentration risk

Customer concentration risk refers to over-reliance on a single or small number of customers, which significantly increases buyer risk and reduces the business's marketability and valuation.

What is the purpose of 'normalizing' financial statements when preparing a business for sale?

Answer: To adjust financials by removing owner-specific and non-recurring expenses to show true earning power

Normalizing removes discretionary, personal, and one-time expenses from financial statements so buyers can accurately assess the business's true ongoing economic performance.

Which factor is MOST likely to reduce a business's marketability when preparing it for sale?

Answer: The owner personally managing all key customer and supplier relationships

When an owner personally controls all key relationships, the business's value is tied to that individual — a 'key man dependency' that buyers view as a critical transition risk.