Buying, selling and succession

Revised practical article; source details and figures are dated to their cited filing or event, with current evidence reviewed through 24 September 2026.

A buyer asks, “What does the business earn?” The seller replies with what is left in the bank at the end of a good month. Both sides are asking the wrong version of the question.

To estimate what a buyer is acquiring, start with the work, assets, customer relationships, contracts, records, and obligations that transfer. Then ask what it would cost to keep the same operation running after the current owner steps away. A business that earns KSh 2 million before paying the founder for sales, purchasing, hiring, and customer service does not necessarily generate KSh 2 million for a buyer. Some of that amount pays for labor the buyer must replace.

This is why owner normalization and succession planning belong in the same conversation. The buyer needs a replacement-management cost to value the cash flow. The seller needs a succession plan so the business can continue producing that cash flow after the handover.

Adjustments need evidence

A seller may propose “add-backs” for a family vehicle, a one-time legal bill, or an unusually large family salary. An add-back is not automatically valid because the owner labels it one-off. Ask four questions:

Did the expense appear in the books or cash outflow?
Was it truly unrelated to future operations?
Would a new owner incur a replacement cost or a similar expense?
Can the claimed amount be matched to invoices, payroll, bank records, or a contract?

A one-time store closure cost may be real, but the buyer still needs to assess whether more sites are at risk. A personal expense can be removed from a normalized earnings estimate only if the business will not incur it after sale and the accounting treatment is clear. Unpaid family labor must be priced at a plausible replacement level. An owner’s commercial relationships may also require a transition period rather than an instant earnings multiple.

A simple adjusted earnings schedule should show each change as a line with a description, period, source, proposed adjustment, buyer view, and evidence status. “Owner says” is attribution, not corroboration. The final value should show what happens if disputed adjustments are accepted, partly accepted, or rejected.

Continuity is part of value

A small company can have strong customer demand and still depend on one person’s phone, memory, password, signature, or supplier relationship. If the founder is unavailable for 30 days, can someone else approve payments, access accounting records, contact customers, or collect a receivable? The key-person-risk article already maps role dependency, access, authority, and continuity. A sale process should translate that map into diligence questions.

The transfer plan can be practical: identify who owns the customer relationship; record how orders are priced and approved; document recurring tasks; confirm account and domain access; list licences and contracts; identify who can sign; and set a handover period for the outgoing owner. Build a contact tree and a backup approver. Keep the principal access to company data in company-controlled accounts. These steps help an owner leave without making the whole firm’s operating knowledge leave with them.

Peer-reviewed family-business succession research treats succession as a process with a founder, successor, organization and timing, rather than one signature at closing [1], [2]. Evidence on Italian family firms also found that performance effects varied with successor type and competitive setting in the sample studied [3]. That does not mean family succession fails, or that an outside buyer is always superior. It means owners should evaluate management capability, governance and market conditions, not assume that family ties alone settle the question.

A buyer needs a bridge, not a headline multiple

Suppose a fictional service firm reports KSh 3 million of annual profit. The owner performs work that would cost KSh 1.1–1.5 million to replace. It takes another KSh 250,000 each year to replace computers and maintain essential software. Working capital has been stable, but two customers account for 55% of sales. A buyer might calculate a normalized earnings range after replacement labor and maintenance, then separately adjust for debt, excess cash, customer concentration, working capital delivered at closing, and transaction terms.

There is no universal multiple to plug in. A customer who can cancel next month, a short lease, a licence that cannot transfer, or uncertain stock quality may change the price or the structure of the deal. Deferred consideration, an earn-out or seller financing may allocate some uncertainty. They also create new risks. The contract needs to say what the payment depends on, which financial statements control, who makes decisions during the earn-out, how disputes are resolved, and what happens if a large customer leaves.

For the seller, compare the headline sale price with the cash actually received after debt, transaction costs, taxes, retained obligations and contingent payments. For the buyer, compare purchase price with the amount of capital required after closing. Inventory and receivables are often treated through a working-capital peg or another agreed formula. That mechanism belongs in the transaction documents, not a generic owner-earnings article.

Build the handover backwards

A succession plan can start from the date the owner hopes to step away and work backwards:

What must the owner personally stop doing before the business can run without them?
Which tasks can be documented, delegated, automated, or covered by a backup?
Who can take over customer, supplier and lender relationships?
What records will a buyer, family successor or employee successor need to trust the earnings history?
What authority will transfer, and when?
Which decisions remain with the current owner during transition, and for how long?

The goal is not to remove the owner’s judgment from the business. It is to make the business less fragile when that judgment is unavailable.

A transfer may also change the company’s financing options. Small-business finance research describes how funding sources develop as firms grow and build information and assets that support lending [4]. For an employee buyout, family transfer or outside sale, the parties should therefore test who can borrow, what security or guarantees are required, and whether the post-transfer business can fund the purchase and still meet operating needs. The research does not prescribe a particular transaction structure; it points to financing capacity as a separate diligence question.

Build the same earnings picture for seller, buyer and lender

A seller usually wants the buyer to see the business at its best. A buyer needs a repeatable earnings estimate after the work, assets and cash cycle are properly funded. A lender needs a repayment bridge that survives a weaker year. Put three views side by side rather than arguing over one label.

Start with the filed or bookkeeping figure for operating profit, EBITDA or net income, and identify its period. Reconcile it to bank and tax records when available. List each proposed add-back separately with amount, account, invoice, beneficiary and reason. Accept an adjustment only if the expense is genuinely nonrecurring or personal, the business no longer needs it, and there is no replacement cost. A one-time legal fee may qualify if the dispute has closed; annual company-secretary fees do not. A family member’s salary is not fully an add-back if that person handles procurement or collections. An owner’s vehicle is not free if deliveries depend on it.

Next, calculate the cost of replacing founder duties. Write a task map: customer sales, operational supervision, hiring, quality approvals, bank relationships, regulatory work, procurement and accounting. Estimate hours and qualifications. Some tasks transfer to an existing employee, some require a new manager, and some may disappear if a corporate buyer already has shared services. Make separate owner-operator and corporate-buyer cases. A single generic replacement salary will not fit both.

Then deduct the cash required to keep the earnings level. Estimate maintenance capex from the asset plan; normalize working capital using monthly receivables, inventory and payables over a full seasonal cycle; deduct taxes and interest according to the valuation perspective; and include debt-like claims. Finally, translate enterprise value to equity value without double counting cash, debt, lease liabilities, customer deposits or working-capital adjustments.

An adjustment ledger protects both sides

The ledger should include seller’s claim, buyer’s response, source evidence, accounting treatment, whether it affects historical earnings or forward cash, replacement cost, status and amount accepted. For a KSh 260,000 vehicle expense, the evidence may show KSh 180,000 personal use and KSh 80,000 business delivery. The buyer might add back only the personal portion, then subtract the cost of a replacement delivery vehicle or lease. The net adjustment may be small or zero. This is more credible than accepting or rejecting the entire line.

For a KSh 180,000 legal expense, ask whether the matter is closed, whether related claims remain, and whether the same counsel is retained annually. If the expense resulted from a recurring permit or customer dispute, it may recur. For KSh 120,000 paid to a family member, verify duties and hours; if a new employee would cost KSh 160,000, the expense is not an add-back but perhaps a KSh 40,000 incremental cost. A KSh 90,000 holiday that never appeared in the accounts cannot be added back to earnings. An owner’s personal spending through the business may reduce taxable income but does not increase book profit unless it was booked as an expense.

Every accepted add-back should pass four checks: it is present in the records; it is not already excluded elsewhere; it will not recur under the buyer’s operation; and removing it does not remove necessary revenue-producing work. Keep unresolved adjustments outside the base case until evidence arrives. If they matter to price, use escrow, seller financing or a specific warranty rather than silently embedding them in the multiple.

Normalize working capital by month and by item

A closing balance can be manipulated by timing. The seller can delay supplier payments, accelerate collections, buy unusually large inventory or draw customer deposits just before completion. Compare month-end balances over at least one full operating cycle. If the business is seasonal, use the corresponding month in prior years or a documented monthly normalization rather than a simple year average. Check unusual sales promotions, stock purchases, supplier settlement holidays and one-off customer advances.

Define the working-capital peg in the sale agreement. Specify receivables net of impairment; inventory net of obsolete, damaged and consignment goods; trade payables based on received goods; and any agreed accruals. State whether payroll, tax, customer deposits, deferred revenue, lease liabilities and related-party balances are included or treated as debt-like. Different definitions can move the same KSh 1 million balance between the working-capital adjustment and the debt adjustment, so avoid counting it in both.

Illustration: normalized NWC has averaged KSh 1.4 million, but closing delivered NWC is KSh 1.1 million. The buyer may seek a KSh 300,000 completion adjustment under the agreed formula. But if the shortfall is caused by KSh 300,000 of old disputed invoices, that balance may be worth less than its face value. If it is due to a seasonal inventory dip immediately before peak sales, the buyer may need to fund replacement stock. Show the reason for the gap and the cash it actually takes to restore normal operations.

Supplier arrears require a separate schedule: supplier statement balance, amount due under terms, disputed amount, agreed extension, next delivery and any security or retention of title. A company can show strong working capital because overdue suppliers are large. That is not a benefit delivered to the buyer. The agreement should say who pays those arrears and how any later claim is handled.

Think about price as a range, not a negotiated multiple

Multiples are shorthand for growth, risk, capital needs and transferability. A private company’s value depends on size, customer concentration, management independence, asset quality, recurring revenue, contracts, financing access, tax compliance and evidence quality. Do not copy a public-company multiple and apply it to a small business without considering liquidity, governance and owner dependence.

For a simple range, estimate normalized free cash flow or maintainable owner earnings under low, base and high cases, then apply a valuation method suited to the buyer’s return requirement. A cash-flow model can show the impact of customer loss, margin changes, maintenance needs and working-capital intensity. A multiple method can be a cross-check if comparable transactions are credible and earnings definitions align. Reverse-solve the purchase price to the required return: what growth, margin, salary savings or synergies would the buyer need? If the answer relies on unproven cross-selling or immediate cost cuts, keep those benefits out of the base price.

To move from enterprise value to equity proceeds, identify debt, lease obligations, shareholder loans, unpaid taxes, employee claims, excess or restricted cash, customer deposits and the working-capital true-up. If normalized EBITDA is KSh 2.29 million and a hypothetical 3x–5x range gives enterprise values of KSh 6.87m–11.45m, that is not the seller’s cheque. Subtract debt and debt-like claims; add only excess unrestricted cash; include the completion working-capital adjustment; then account for transaction costs, tax and escrow. The seller should also consider whether deferred consideration or an earn-out is realistically collectible.

Test what the lender can support

A lender needs cash available for debt service after replacement labor, tax, maintenance and required working capital. Build the principal and interest schedule by date. Compare it with the operating cash forecast, not just annual EBITDA. Model a customer paying one month late, the largest contract not renewing, input costs increasing and an asset needing repair. If the business only covers debt under the seller’s full workload and zero maintenance, the price or financing is too high.

A buyer can calculate maximum debt service under a selected minimum coverage assumption, but that assumption is not automatically the bank’s covenant. The lender may define EBITDA add-backs, eligible cash, lease claims and debt service differently. Obtain the actual offer and covenant definition. Include arrangement fees, valuation and legal cost, insurance, collateral and personal guarantees. If the buyer must invest working capital after closing, add that amount to cash required at completion rather than treating it as an operating expense later.

Seller financing can close a valuation gap and signal confidence, but it creates a claim that needs repayment terms, subordination, security, default remedies and tax advice. An earn-out is different: it depends on future results. Define the metric, time period, customer cohort, returns, discounts, owner control and reporting rights. Revenue alone can reward unprofitable sales. Collected contribution or gross profit may be closer to the seller’s influence if the buyer controls overhead and service policy. Document dispute resolution.

A 90-day transition and continuity test

During the first two weeks, confirm bank access, payment approvals, customer and supplier contacts, employee payroll, tax accounts, licenses, leases, insurance, loan covenants, stock ownership and outstanding orders. Reconcile cash and all open invoices. Identify obligations due in the next 30 days and any customer money tied to incomplete delivery. Avoid a large distribution or nonroutine purchase before the first cash close.

From days 15 to 45, shadow the founder on sales quotations, procurement, quality approvals, customer complaints, collections, repairs and regulatory work. Record process steps and transfer credentials lawfully. Identify every duty with no backup. Check whether supplier credit, customer access or a technical permit depends on the founder personally. A company can have good normalized earnings and still be untransferable until those dependencies are addressed.

By day 90, compare actual receipts, contribution, stock ageing and service quality with the diligence model. Verify customer retention and staff continuity. An earn-out should reflect what was agreed and independently observable. Track the cash impact of duplicate staffing, transition support and integration. If the new owner wants to centralize finance or procurement, model the timing and one-time costs before removing staff who hold critical knowledge.

Family succession needs the same discipline. Document who owns shares, who draws salary, who receives distributions, who approves payments and who can sign contracts. Train a successor in the customer and supplier routines while the founder is still available. Agree an emergency transfer plan for illness or death, including bank mandates, key passwords, insurance and authority. Fairness among heirs and operational control may require separate legal and estate planning advice.

Decide with an evidence list

The buyer’s final note can show reported earnings, supported adjustments, replacement labor, normalized maintenance and working capital, financing required, downside debt coverage, equity price range and unresolved evidence. For each open item, state the requested document, custodian, due date and impact on price or contract terms. If the seller will not provide a key customer ledger or loan agreement, reflect that uncertainty in the offer instead of pretending the number is known.

The seller should prepare the same bridge before listing. Clean monthly accounts, reconcile personal expenses, document equipment and maintenance, resolve supplier balances, renew licenses, map customer concentration, train backups and define what cash and working capital will remain at closing. These steps can improve the business even if no sale occurs. A buyer is purchasing future transferable cash generation; clean evidence and reduced founder dependence make that claim more credible.

Separate what is known from what is promised

A sale process often mixes three different kinds of value: cash the business has already produced, cash it may produce if current conditions persist, and value that depends on future work by the buyer or seller. Put each claim in the right column before negotiating.

Verified historical cash can be tied to a bank statement, filed return, customer remittance, payroll record, or supplier invoice. Maintainable earnings require a judgment about whether the historical activity can continue after the sale. Upside depends on a specific action such as adding a branch, winning a contract, raising prices, replacing a machine, or securing a permit. A buyer may pay for upside, but the purchase price should state who bears the execution risk.

For example, suppose a workshop shows normalized annual cash earnings of KSh 6 million after paying a market replacement salary for the founder. The seller says a new service bay can add KSh 2 million. That forecast should not quietly be included in the KSh 6 million base. Ask for installation cost, staff, ramp time, licensing, demand evidence and the cash needed to hold parts. If those items are not funded, the buyer is purchasing a plan, not current earnings. A contingent payment can share risk: the seller receives some proceeds only if documented revenue or gross profit is achieved, with a definition that prevents either side from manipulating timing or shifting costs.

An earn-out can create disputes if the seller is paid on sales while the buyer controls pricing, credit terms, overhead allocation and customer acceptance. Define the metric, accounting policy, reporting access, dispute process, treatment of returns and bad debts, and what happens if the buyer changes the business. A simple cash-at-close price may be preferable when the records are weak or the parties cannot agree on measurement. Complexity does not repair poor evidence.

A buyer's practical diligence sequence

Diligence should follow the way cash moves through the business, not just the order in which folders arrive.

Establish the perimeter. Identify the seller, operating company, owners of land and equipment, trading names, subsidiaries, guarantees and related parties. Confirm which contracts, permits, employees, stock, intellectual property and customer data are actually transferable.
Tie sales to collections. Sample invoices from order to delivery note, customer statement, bank deposit and ledger. Investigate credit notes issued after year-end, cash sales without sequential receipts, related-party sales, disputed balances, and customers who pay only after the owner calls.
Tie costs to delivery. Trace a sample of supplier invoices through purchase order, goods received, stock record and payment. Check whether freight, duties, repairs, owner labour or warranty work is missing from the apparent margin.
Rebuild payroll and owner work. List the owner's weekly duties and the employee who can perform them. Use a realistic replacement wage plus employer obligations. A salary add-back without a named replacement plan overstates the buyer's cash.
Inspect inventory and equipment. Count stock by SKU, age, condition and last sale. Observe equipment running under normal load; inspect service history, safety certification, spare-parts availability and deferred repairs. Book value is not evidence of usable value.
Reconcile obligations. Confirm tax, employee, landlord, lender, supplier, customer-deposit and litigation balances directly where possible. A seller's spreadsheet is a starting schedule, not third-party confirmation.
Stress the first year. Build monthly cash needs around seasonality, customer retention, supplier deposits, debt repayment and the transition. A profitable annual forecast can still fail in a month where stock must be paid for before a large customer settles.

Use a materiality threshold to organize work, not to excuse a known control problem. A small unexplained cash difference can signal that the ledger is unreliable; a large balance can be immaterial if independently confirmed and not at risk. Record source, owner, date, test, result and unresolved consequence for each diligence item.

Match the legal price to the economic bridge

Enterprise value is not the cash that reaches the seller. The bridge should state whether the agreed amount assumes cash-free, debt-free delivery, a normal level of working capital, and specified treatment of leases, shareholder loans, unpaid taxes, customer deposits and transaction expenses. Then reconcile that bridge to the completion accounts.

Working capital deserves a seasonal baseline. A business that carries more stock before its busy season may need a higher normal level than a simple twelve-month average suggests. Compare like months across several years, remove unusual one-offs only with evidence, and separately identify old or disputed receivables. A purchase-price adjustment for working capital should not reward the seller for overdue debtors or obsolete stock.

The parties should also write down the measurement rules before closing. Define included accounts, accounting standards, cut-off procedures, stock-count method, reserves for bad debts and obsolete inventory, and access to records. State who prepares the completion accounts, how objections work, and whether an independent accountant decides only the disputed items. Vague wording converts a spreadsheet disagreement into a legal dispute.

A seller's transition plan is part of the asset

A founder may personally remember prices, exceptions, supplier promises and customer preferences that never entered the system. That knowledge is valuable only if it can be transferred. During the diligence period, require the current owner to document recurring work, introduce key customers and suppliers, train successors, transfer passwords and records securely, and explain approvals or informal credit arrangements.

Transition should be measured through operating results, not attendance. Useful milestones include invoice error rate, on-time delivery, customer retention, rework, stock variance, collection days and the percentage of decisions completed without founder intervention. A business that remains dependent on the founder after six months has not completed the transition, even if the handover calendar says it has.

A family successor needs the same clarity. Le Breton-Miller, Miller and Steier describe effective succession as a process involving preparation, relationships, successor development and the transfer of leadership, rather than a single date [2]. In practical terms, let the successor own a real budget, supplier negotiation or customer portfolio before the founder leaves. Agree who can approve spending and hiring. Family harmony is not protected by leaving authority ambiguous.

Closing gates that protect both sides

Before signing an unconditional transfer, answer five questions with evidence:

Can the buyer operate the business legally on the first day after close?
Does the buyer have enough liquidity for the first seasonal working-capital peak and known repairs?
Have material customer, supplier, employee, landlord and lender consents been obtained or clearly conditioned?
Does the price bridge say how cash, debt, working capital and disputed items are treated?
Is there a practical plan for the seller to transfer relationships, systems and authority?

If an answer is no, convert it into a closing condition, escrow, holdback, price adjustment or explicit risk allocation. Do not use a vague warranty to substitute for a missing permit or unverified title. A warranty may provide a claim after a loss; it does not keep the doors open while the buyer pursues that claim.

The buyer and seller can then compare scenarios on common assumptions: a normal year, a downside year with slower collections and lost customers, and a transition case with extra management cost. Report cash to the seller separately from the buyer's post-close cash requirement. This avoids the common mistake of treating the headline enterprise value as both the seller's proceeds and the buyer's total investment.

Workbook map

The Project 1 workbook provides a Buy Sell and Succession checklist for entity perimeter, title, sales-to-cash tracing, owner duties, asset condition, tax and creditor claims, working-capital baseline, contract transfer and handover milestones. Use it with the Owner Earnings, Maintenance, Working Capital and Debt and Growth schedules to organize diligence. Evidence Vectors identifies which linked schedules are fictional templates and where actual source documents would need to be recorded. The current workbook is an evidence checklist, not a transaction valuation or purchase-price calculator; proposed add-backs still need source documents and a replacement-cost test.

Technical appendices

The worked calculations and source boundaries below extend this article's examples. They keep assumptions and unresolved inputs visible so readers can reproduce the steps without mistaking an illustration for an issuer or sector estimate.

Appendix 03 - Debt, growth and transfer of ownership claims

References

[1] W. C. Handler, “Succession in Family Business: A Review of the Research,” Family Business Review, vol. 7, no. 2, pp. 133–157, 1994, https://doi.org/10.1111/j.1741-6248.1994.00133.x.

[2] I. Le Breton-Miller, D. Miller, and L. P. Steier, “Toward an Integrative Model of Effective FOB Succession,” Entrepreneurship Theory and Practice, vol. 28, no. 4, pp. 305–328, 2004, https://doi.org/10.1111/j.1540-6520.2004.00047.x.

[3] M. Cucculelli and G. Micucci, “Family Succession and Firm Performance: Evidence from Italian Family Firms,” Journal of Corporate Finance, vol. 14, no. 1, pp. 17–31, 2008, https://doi.org/10.1016/j.jcorpfin.2007.11.001.

[4] A. N. Berger and G. F. Udell, “The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle,” Journal of Banking & Finance, vol. 22, nos. 6–8, pp. 613–673, 1998, https://doi.org/10.1016/S0378-4266(98)00038-7.

Companion resources

The workbook and technical appendices are available with research membership. The video production guide maps this article to a planned episode; a published video is not yet available.