The Two-Year Value Creation Plan Before Selling a Business

Owners who eventually sell a company often begin preparing long before a deal is on the table. The roughly 24 months ahead of a sale process function as a runway, a stretch long enough to change how a business looks to a buyer without the appearance of last-minute dressing up. Buyers and their advisers tend to reward companies that are diversified, documented, and able to run without a single indispensable person. The moves below describe what lower-middle-market owners commonly do during that window, and why each tends to matter to the eventual price and terms.

Why a two-year runway matters

Value creation before a sale is rarely instant. Diversifying a customer base, promoting a manager into a genuine leadership role, or building a clean set of normalized financials all take several quarters to show up in the numbers. A two-year horizon also gives a company time to demonstrate a trend rather than a single strong month. Buyers generally underwrite on trailing performance, often the last 24 to 36 months, so improvements made too close to a sale may not yet appear in the historical record that diligence relies on. Owners who start earlier tend to have more room to let changes compound and to correct problems before a buyer ever sees them.

The runway also shapes how a business reads to the market. A company that shows two consecutive years of steady diversification, growing recurring revenue, and improving margins tells a very different story than one that posts a single unusually strong year just before listing. Buyers and lenders tend to treat the former as a durable pattern and the latter with caution, sometimes discounting the most recent period. Because concentration, owner dependence, and process gaps are the issues that most often surface during diligence, addressing them across a full two years lets an owner present resolved facts rather than open questions.

Reducing customer and supplier concentration

Concentration is among the most scrutinized risks in a private-company sale. When one customer represents a large share of revenue, a buyer inherits the possibility that the relationship ends after closing. Advisers commonly describe rising scrutiny as any single customer crosses roughly 10 percent of revenue, with deeper investigation, price reductions, or deal protections becoming more likely once a customer approaches or exceeds 30 percent of the total. Beyond that level, some businesses become difficult to sell without significant buyer protections.

Common moves during the runway include:

• Diversifying the base by adding accounts so no single customer dominates revenue.
• Securing longer-term contracts with key accounts, so income is contracted rather than at-will.
• Institutionalizing relationships by shifting primary contacts from the owner to employees.
• Addressing supplier and channel concentration, since heavy dependence on a single vendor or distribution platform carries a parallel risk.

Where concentration cannot be fully resolved in time, buyers frequently manage the residual risk through escrows, holdbacks, or earnouts that tie part of the price to customers staying after the sale.

Formalizing recurring revenue

Predictable revenue tends to command a premium over one-off project income because it is easier to forecast and to finance. Owners commonly formalize recurring revenue by moving informal or repeat arrangements onto written subscriptions, service agreements, or renewal terms. Documenting retention and renewal history helps a buyer see that the recurring stream is durable rather than assumed, which supports both a stronger multiple and a smoother diligence conversation about revenue quality.

The distinction matters most for businesses that already earn repeat income but have never captured it in contracts. A maintenance client billed by handshake each year and the same client on a signed annual agreement produce identical cash today, yet a buyer reads them differently. The contracted version reduces the assumption a buyer has to make about how much revenue survives the transition, and it gives a lender something concrete to underwrite. Owners commonly spend part of the runway converting the strongest of these informal relationships into written terms.

Building a management layer

A company that depends on its owner for sales, key relationships, or daily decisions carries what advisers call key-person or owner-dependence risk. Buyers worry that performance drops once the owner steps back. This dependence is commonly cited as a source of multiple compression and of structural terms such as longer transition periods, earnouts, or retention arrangements for key staff. Dependence on the owner for revenue generation is generally viewed as the most serious form.

Reducing that reliance usually involves:

• Promoting or hiring a leadership layer able to run the business independently.
• Delegating major customer relationships so several people, not one, hold them.
• Cross-training staff so critical knowledge is not concentrated in a single person.

Closely related is the documentation of institutional knowledge. Much of a small company's know-how tends to live in the founder's head. Converting that tribal knowledge into written standard operating procedures, organization charts, and training materials makes a business more transferable. Documentation also shortens the post-sale transition and reassures a buyer that operations will continue without disruption. A company that can hand a new owner a written account of how work actually gets done presents a smaller integration risk than one whose processes exist only as habit.

Improving margins and working capital

Because enterprise value is often expressed as a multiple of adjusted earnings, durable margin improvement can raise value on two fronts, higher earnings and sometimes a stronger multiple. Owners commonly review pricing, retire unprofitable product lines, and remove discretionary costs that do not support the business. Working capital receives similar attention. Buyers generally expect a normal level of working capital to remain in the business at closing so it can operate from day one, and disputes over what counts as normal are common. A sell-side analysis typically studies 12 to 24 months of working-capital cycles to establish that baseline, so tightening receivables, inventory, and payables during the runway helps make the figure defensible.

Sequencing the work across two years

Owners often stage these changes rather than attempting all of them at once. The moves that take longest to bear fruit, such as diversifying customers and building a management layer, tend to be started first, because they need time to appear as a trend. Documentation and contract cleanup can proceed in parallel throughout the period. Financial preparation, including a sell-side quality of earnings analysis, is frequently timed toward the back half of the runway, once the operational improvements are underway and there is a cleaner recent history to normalize. Sequencing this way lets the earlier work strengthen the numbers that the later financial review will present.

Contract hygiene: assignment and change of control

Contracts that cannot transfer cleanly can complicate or delay a sale. Legal diligence typically reviews material customer, supplier, lease, and license agreements for anti-assignment and change-of-control provisions. Whether these clauses are triggered depends heavily on how the transaction is structured. Asset sales commonly trigger anti-assignment clauses unless an exception applies, stock sales generally do not because the contracting entity is unchanged, and mergers vary with the structure and the exact clause language. A frequently used threshold for defining a change of control is 50 percent of voting power, though negotiated deals sometimes set it higher. Where third-party consents are required, identifying them well before a sale gives time to obtain them in an orderly way rather than during a rushed diligence period. This article is educational and is not legal, tax, or investment advice.

Getting financials QoE-ready

A sell-side quality of earnings report is a diligence-grade analysis of a company's recent financial performance, commonly covering the trailing 24 to 36 months. It normalizes earnings by adding back non-recurring, non-operating, and owner-specific items to present adjusted EBITDA the way an acquirer would view it, and it examines revenue quality and working capital. Preparing one before going to market lets an owner surface and resolve issues, such as concentration or poorly supported add-backs, in advance rather than under buyer pressure. Because each dollar of adjusted earnings is multiplied by the valuation multiple, clean and well-documented financials feed directly into proceeds. Platforms that run a structured sale process, including Bankerly, typically assemble this financial foundation alongside the concentration, management, and contract work described above, so the pieces of a two-year readiness effort reinforce one another rather than being tackled in isolation.

Sources

• Morgan & Westfield: Reducing Concentrations of Risk Before Selling Your Business
• Warren Averett: Benefits of a Sell-Side Quality of Earnings Report
• Doeren Mayhew: Understanding a Quality of Earnings Report in Pre-Sale Due Diligence
• Thomson Reuters: Legal Due Diligence Guide for Public and Private Deals