We are highly focused on increasing our revenue and profit before we sell, but our exit advisor says our corporate governance and legal contracts are messy. How does cleaning this up actually impact our valuation?

Question

Tyler Smith · Accepted Answer

Many owners make the mistake of focusing solely on revenue and profit, only to watch their deals fall apart in the eleventh hour due to messy legal and corporate governance. In the Step by Step Exit model, the Foundation pillar is the bedrock of transaction readiness.

Messy contracts, unsigned operating agreements, unverified intellectual property ownership, and outdated customer agreements are major red flags. When a buyer's legal team uncovers these issues during due diligence, they do not just ask you to fix them. They use these gaps as leverage to heavily discount your purchase price, demand massive indemnification escrows, or walk away from the deal entirely.

During your exit runway, you must systematically audit your corporate records. Ensure all customer and vendor contracts have clear, assignable clauses so you do not need permission to transfer them to a new owner. Verify that all employees and independent contractors have signed proper intellectual property assignments.

Cleaning up your corporate foundation does not directly increase your EBITDA, but it absolutely protects your multiple. It tells the buyer that your business is built on solid ground, eliminating legal liabilities that could drain post-transaction profits. It ensures a clean, fast closing with minimal escrow holdbacks.