We have agreed on a five-year target date to exit our business. What concrete actions must we take during this first year of our runway to ensure our financial and legal foundation is clean enough for institutional buyers?

Question

Tyler Smith · Accepted Answer

Year one of a five-year exit runway is about looking under the hood and addressing structural debt before it becomes an expensive problem. Institutional buyers perform exhaustive due diligence, and any legal or financial messiness will result in a lower valuation or a collapsed deal.

Start with your corporate structure and tax planning. Work with a specialized transactional tax CPA to review your entity type. Transitioning from an LLC or an S-Corporation, or setting up a qualified small business stock structure, can save you millions in taxes, but these moves often require years of holding time to realize the benefits.

Next, initiate a clean-up of all legal agreements. Ensure every employee and contractor has signed an intellectual property assignment agreement. If you have partners, review and update your buy-sell agreements. Clean up any lingering disputes, outstanding state tax filings, or outdated municipal permits.

On the financial front, begin the transition from compilation-level financials to reviewed or audited financial statements by a reputable regional accounting firm. While you do not need a full audit on day one, starting the process now ensures you have three to five years of pristine, GAAP-compliant historical financials when you eventually go to market. This baseline level of financial hygiene builds immediate trust with sophisticated private equity groups and strategic acquirers.