When you put your business on the market, your financial statements become your most important sales tool. Buyers will judge your company’s health, value, and future potential by what they see in your books.
Well-prepared financials don’t just speed up due diligence — they can also increase your sale price by giving buyers confidence and reducing their perceived risk.
Clean Up Your Books
Messy records are a red flag for buyers. They make it harder to assess performance and create doubt about your company’s operations. Before you sell:
- Separate personal and business expenses. Remove non-business transactions from the books to give a clear picture of profitability.
- Categorize expenses correctly. Misclassifying costs can distort profit margins. For example, don’t record a major equipment purchase as an everyday operating expense.
- Use consistent accounting practices. If you aren’t already on accrual accounting, consider switching — it’s the standard most buyers expect.
Evaluate Owner Compensation
If your salary is far above or below market rate, buyers will adjust for that in their valuation. Work with your accountant to normalize owner compensation so it reflects what it would cost to replace you in the business.
Consider Audited Financial Statements
While not always required, having audited statements from an independent CPA can give you a competitive edge. Audited financials:
- Provide third-party verification of accuracy.
- Reduce buyer skepticism.
- Can justify a higher purchase price.
Think of it as removing uncertainty — and uncertainty often costs money in a deal.
Use EBITDA Add-Backs to Show True Earnings
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a common valuation metric. “Add-backs” adjust EBITDA to remove one-time or non-recurring costs that won’t continue after the sale. Examples include:
- Excess owner salary.
- Salaries to family members who don’t work in the business.
- Personal expenses run through the company (travel, club memberships, home office costs).
- One-time professional fees for the sale.
Why it matters: If you add back $50,000 in one-time expenses and your valuation multiple is 5x EBITDA, that adjustment could increase your sale price by $250,000.
Quality of Earnings (QoE) Reports
A seller-prepared QoE report digs deeper than standard financials to show sustainable earnings and flag potential risks. Benefits include:
- Increased credibility and transparency.
- Faster due diligence.
- Early identification of red flags so you can fix them before buyers see them.
A QoE report can be especially persuasive with institutional buyers and private equity firms, who rely heavily on this level of analysis.
Why Financial Preparation Matters
Well-prepared financials can:
- Speed up due diligence.
- Support a higher valuation.
- Reduce the likelihood of post-closing disputes.
The time and investment you make now will pay off in smoother negotiations and a stronger final price.
FAQs
Q: Should I get my financial statements audited before selling?
A: If your goal is to attract serious buyers and justify a higher valuation, audited statements are worth considering — especially for mid-sized businesses.
Q: What’s the most common financial red flag for buyers?
A: Commingling personal and business expenses. It creates doubt about the accuracy of your financials.
Q: How far back do I need to prepare records?
A: Most buyers want at least 3 years of clean, organized financial statements and tax returns.
