CBB Exit Planning & Seller Preparation 1 — Questions and Answers
Question 1: When should a business owner ideally begin exit planning before selling their business?
- 6 months before the intended sale
- 1 year before the intended sale
- 3-5 years before the intended sale (Correct answer)
- At the time of listing the business
Correct 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.
Question 2: What does 'Seller's Discretionary Earnings' (SDE) measure in the context of exit planning?
- The seller's personal federal income tax liability
- The total economic benefit a single owner-operator derives from the business (Correct answer)
- The business's gross annual revenue before expenses
- The business's total outstanding debt obligations
Correct 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.
Question 3: Which action BEST improves a business's transferability and value before a sale?
- Increasing the owner's personal involvement in all daily decisions
- Concentrating sales with a single high-volume customer
- Documenting standard operating procedures and creating training manuals (Correct answer)
- Delaying capital expenditures to maximize short-term cash flow
Correct 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.
Question 4: What is the primary purpose of a business readiness assessment conducted before listing?
- To establish the final asking price for the business
- To identify weaknesses that should be addressed before bringing the business to market (Correct answer)
- To evaluate the financial qualifications of prospective buyers
- To satisfy state licensing requirements for business brokers
Correct 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.
Question 5: A business that generates 75% of its revenue from a single customer is said to have what issue?
- High scalability potential
- Strong recurring revenue
- Customer concentration risk (Correct answer)
- A defensible competitive moat
Correct 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.
Question 6: What is the purpose of 'normalizing' financial statements when preparing a business for sale?
- To reduce reported income and minimize the seller's capital gains tax
- To adjust financials by removing owner-specific and non-recurring expenses to show true earning power (Correct answer)
- To convert cash-basis accounting statements to accrual-basis format
- To project future revenue growth for potential buyers
Correct 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.
Question 7: Which factor is MOST likely to reduce a business's marketability when preparing it for sale?
- A diversified customer base with no single client above 15% of revenue
- Strong recurring revenue under long-term contracts
- The owner personally managing all key customer and supplier relationships (Correct answer)
- Well-documented operational procedures accessible to all staff
Correct 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.
CBB Exit Planning & Seller Preparation 1
When should a business owner ideally begin exit planning before selling their business?