How to Get Your Business Ready for a Sale—Before You Plan to Sell: Part 2” is the second post of Carol’s three-part series on the Bank of America Small Business Community about how to make a graceful – and profitable – exit from your business. Carol begins:

Just like any other facet of your business, when it comes to a sale, planning is critical. In Part 1 of this series, I covered prioritizing shareholder objectives, getting a team in place and more.

Below, I share additional steps, so that you can get full credit for the strong business that you have built.

Identify and Eliminate “Non-core” Expenses

Closely-held companies can often be run for tax efficiency, which maximizes short-term tax benefits for shareholders by minimizing reported cash flow and earnings.

Strategies of running expenses through the business that aren’t critical to the day-to-day operations of the business — such as your car or a “company meeting” in the Bahamas — may soften your tax bill, but are ultimately detractors from sale value.

Businesses are typically valued as a multiple of cash flow or earnings. For a business that is valued at 6x cash flow, for example, saving the taxes on $100,000 from extra expenses (at whatever tax rate you pay, so some fraction of the $100,000) will cost you $600,000 of value in a sale.

Start cutting these non-core expenses two years prior to selling your business. If you are close to initiating a sale and it is too late to eliminate such expenses, work with your investment banker on what is called “pro-forma” financial statements.

This pro-forma will identify and add back the expenses that would not be needed by the new buyer. While a buyer might fight you on some of those, you should get at least partial credit for reasonable add-backs, enhancing your sale value.

Get Your Financials Audited

While an audit can be a lengthy and pricey process, it is critical for a sale of a business with any meaningful valuation (if you have more than $5 million of revenue, this means you). If your financial statements have not been audited by an experienced and reliable accounting firm, they are not typically regarded as trustworthy by potential buyers.

You can read the rest of the post here.