A private equity group came knocking on a company doing more than forty million in revenue. The owner had not gone looking for a buyer and had no particular plans to sell. The group opened his financials, spent some time with what they found, and passed.
Nothing was wrong with the business. It had grown from around seven million to more than forty million in five years, which is the kind of trajectory that brings buyers to your door in the first place. The problem was the record of that growth. The books had never been converted to a basis an outside party could read, and no one looking from the outside could get their arms around the numbers.
That story came up in a recent conversation I had with Brian Kofford on the Business Transition Roadmap. Brian is a CPA who has spent 25 years working with founder-led companies, and he came into this work as an entrepreneur himself, which changes how he sees it. Choosing a CPA for a business transition turns out to matter more than most owners expect, because a firm that only prepares returns is not doing proactive tax strategy for business owners, and those are different jobs. His team spent a couple of months cleaning up that company’s last two years of financials. The same company went back to market, received nine letters of intent, and closed at a hundred million.
The business itself never changed in those two months. Only the record of it did.
What a buyer looks for when you are getting your business ready
Most owners I work with are excellent at the things that built the company. They are visionaries, or they are extraordinary at sales, or they can create something out of nothing when the situation calls for it. Very few of them describe themselves as detail people when it comes to accounting, and that gap tends to stay invisible until someone from the outside asks to look.
Brian’s experience is that buyers typically want two to three years of clean, accrual-basis financials, and that five years is better when there is time to build the record. Part of what has to happen is normalizing the numbers, which means untangling the personal spending that accumulates over a couple of decades of running a company. The conference trip that turned into a family vacation, the vehicle, the various expenses that made sense while you owned the whole thing. None of that is improper. It simply does not represent how the business will operate under someone else, and a buyer needs to see the version that does.
This is the part of business transition planning that gets deferred the longest, because it never feels urgent. There is no deadline attached to cleaning up your books. Right up until a group knocks on your door, and then there is.
Why tax planning before selling a business takes years
I am a futurist thinker by nature, which means I tend to look at a transition from the far end and work backward. That habit is useful here, because the financial and tax work that matters most has a long lead time built into it.
Estate planning, trusts, charitable remainder trusts, donor advised funds, and moving ownership toward the next generation all depend on acting while the valuation is still low. The mechanics vary, and the underlying logic is consistent. You are moving value out of your estate before that value climbs, and doing it in a way that holds up to scrutiny.
Brian made a point about that scrutiny that I want owners to hear. The IRS looks at the timeline. When the gap between the planning and the payday is short, the whole arrangement starts to look like it existed for one reason. When the gap is years, it looks like what it is.
I remember a period when the lifetime exemption was expected to be reduced significantly, possibly cut in half, with the change landing on January 1. By the time it was widely discussed it was already September. Every advisor I talked to said the same thing to the owners calling them. It was too late. The strategies still worked perfectly well. There was simply not enough runway left to use them.
I have also watched this play out in smaller ways that cost real money. Two brothers started a company together and agreed verbally that one of them held forty percent. They never documented it, and the tax returns showed one hundred percent ownership for years while the business grew. When they went to sell, that forty percent had to be dealt with first, and doing it at that point created a taxable event that could have been close to zero if they had handled it early.
Clean books matter just as much in an internal business transition
Owners sometimes assume this conversation only applies to a sale to an outside party, and that an internal business transition is simpler. My experience runs the other direction. Succession planning for business owners who intend to keep the company in the family carries all of the same financial requirements, with a successor who has more to learn and less room to ask a stranger for help.
If you are handing the company to a son or a daughter, or to a group of employees who have worked alongside you for years, clean financials are what let them understand the business on their own terms. Good books carry their own logic. A younger successor can follow them without needing you standing beside every line explaining why a particular number sits where it does. That matters enormously in family business succession planning, where the successor is often learning the financial side of the company for the first time while also absorbing everything else.
The work is the same either way. Whether the company goes to an outside buyer or to the next generation, the preparation looks much alike, and it leaves the owner with options rather than a single path they have to take because nothing else is available.
Financial readiness is the floor
Here is where Brian and I landed, and where this conversation goes beyond accounting.
Clean books and thoughtful tax strategy open the door. They do not finish the work. A company still has to function without the owner sitting in the middle of every decision, because a buyer has little interest in acquiring something that stops working the moment the founder walks out. The systems, the people, and the culture underneath all of that take years to build.
And the owner still has to answer a question that no financial statement addresses. Brian compared founders to professional athletes who cannot quite let go of the game, and I think that comparison holds. So much of what an owner has done and who they have been is bound up in the company. What happens when that is no longer true?
Entrepreneurs like to walk off the cliff and find the parachute. It is a strength, and it is how most of these companies got built. What is harder is walking off the cliff when the parachute is already gone. The transitions that land badly are almost always the abrupt ones, and they fall hardest on the owner and on the family standing around them.
Long timelines give you room for all of it. The tax strategy, the successor development, and the slower work of figuring out what comes next for you personally. Owners ask me when to start succession planning, and my answer is almost always earlier than feels necessary. On average, entrepreneurs hold roughly eighty percent of their net worth inside their business, and roughly half of businesses never sell at all. Those two numbers together are the whole argument.
Being prepared is in your interest regardless of what you eventually decide to do. It is what turns a transition into something you choose rather than something that happens to you.
Business transition planning works best with a guide who has walked the road before. Visit transitionstrategists.com/discovery to schedule a call.
