How to Prepare Your Financials Before Selling Your Business

I'm going to be direct: messy financials kill more deals than bad businesses do.

I've seen profitable, well-run companies sit on the market because the owner couldn't produce clean numbers. I've seen buyers walk away from otherwise great deals because the books didn't match the story. And I've seen sellers leave hundreds of thousands of dollars on the table because their financials didn't clearly show what the business actually earned.

If you're thinking about selling in the next 12 months, this is the most important thing you can do right now.

Why Financial Preparation Matters

When a buyer looks at your business, the financials are the foundation of everything. The purchase price, the deal structure, the financing — all of it flows from your numbers. If your numbers are unclear, every part of the deal gets harder.

Here's what happens with messy books:

• Buyers offer less because they can't verify your claims
• Due diligence takes longer and costs more
• Lenders won't approve SBA financing without clean financials
• The deal falls apart when the buyer's accountant finds inconsistencies

Clean financials don't just make the sale smoother — they directly increase what you get paid.

The Financial Documents You Need

At minimum, you should have these ready before going to market:

Profit & Loss Statements (3 Years)

Three years of P&L statements, ideally prepared by a CPA or bookkeeper on an accrual basis. These should clearly show:

• Revenue by category or service line
• Cost of goods sold
• Gross margin
• Operating expenses (broken out, not lumped together)
• Net income

If you're on cash basis accounting, that's fine — but be prepared for a buyer to request accrual adjustments.

Balance Sheets (3 Years)

Buyers want to see what the business owns and owes. Your balance sheet should accurately reflect:

• Cash and accounts receivable
• Inventory (if applicable)
• Equipment and fixed assets
• Accounts payable and debt
• Owner's equity

Tax Returns (3 Years)

Your tax returns are the one thing a buyer knows you didn't fabricate (because you signed them under penalty of perjury). If your P&L shows $800K in profit but your tax return shows $400K, that's a problem you need to explain.

Ideally, your tax returns and your internal financials tell the same story. If they don't, you need to reconcile them and document why.

Accounts Receivable and Payable Aging

Buyers want to know: who owes you money, how old is it, and is it collectible? And what do you owe, and when is it due? A clean AR/AP aging report shows the business is well-managed.

The Add-Back Schedule

This is where deals are won or lost.

An add-back schedule shows the buyer what the business actually earns by adding back expenses that are personal or non-recurring. Common add-backs include:

• Owner's salary and benefits above market rate
• Personal expenses run through the business (car, phone, meals, travel, insurance)
• One-time costs (lawsuit settlement, equipment replacement, COVID-related expenses)
• Non-recurring professional fees (new website build, rebranding, one-time consulting)

The key: every add-back must be documented and defensible. A buyer's accountant will challenge each one. If you can't prove it, it doesn't count.

Common mistakes:

• Adding back expenses that are actually necessary to run the business
• Not having receipts or documentation for personal expenses
• Claiming add-backs that are aggressive or hard to justify
• Forgetting to add back legitimate items (like an above-market lease to a related party)

Clean Up These Common Problems

Commingled Personal and Business Expenses

This is the most common issue I see. The owner's car payment, family cell phone plan, personal travel, and home office expenses are all running through the business P&L.

Fix it: Separate personal expenses starting now. For the historical period, document each personal expense clearly so it can be properly added back.

Revenue Recognition Issues

If you're recognizing revenue inconsistently — booking a full annual contract in the month it's signed, for example — clean it up. Buyers and their accountants will normalize revenue recognition, and surprises during diligence are never good.

Inventory That Doesn't Match

If you carry inventory and your balance sheet says $200K but the warehouse has $120K, that's a problem. Do a physical inventory count and adjust your books to match reality.

Undocumented Cash Revenue

If part of your revenue is cash and it's not on the books, it doesn't exist for valuation purposes. I know it's frustrating — you earned that money — but a buyer can't pay for revenue they can't verify, and a lender definitely won't lend against it.

Going forward, put everything through the books. The 12 months of clean, documented revenue before a sale is worth far more than the tax savings from unreported cash.

Related Party Transactions

If you're paying rent to yourself (the business leases space you own), paying family members who don't actually work, or buying from a company you have an interest in — all of this needs to be disclosed and documented at fair market value.

Buyers expect to see this. It's not a problem if it's transparent. It becomes a problem when it's hidden.

The 12-Month Cleanup Timeline

If you're planning to sell in 12 months, here's the priority order:

Months 1–3:

• Hire a CPA or bookkeeper if you don't have one
• Separate all personal expenses from the business
• Reconcile bank statements with your books
• Start building your add-back schedule

Months 4–6:

• Get your P&L and balance sheets professionally prepared
• Reconcile your tax returns with your internal financials
• Document any one-time or non-recurring expenses
• Do a physical inventory count if applicable

Months 7–9:

• Prepare the add-back schedule with supporting documentation
• Review AR aging and collect what you can
• Pay down unnecessary debt
• Organize all financial documents in one place

Months 10–12:

• Have your CPA review everything for consistency
• Prepare a financial summary / offering memorandum
• Be ready to answer detailed questions about every line item

What "Good" Looks Like to a Buyer

A buyer who opens your financial package and sees three years of clean, CPA-prepared financials with a well-documented add-back schedule and matching tax returns will take you seriously. They'll move faster, offer more, and negotiate less aggressively.

A buyer who gets a shoebox of QuickBooks exports with unexplained categories and add-backs scribbled on a napkin will either lowball you or walk away.

The difference between these two scenarios is preparation, not profitability.

Get Help Early

If your books are a mess, hire a bookkeeper now. If you have complex add-backs, work with a CPA who understands business sales. If you want to know where you stand, reach out — I'll tell you honestly what needs to be fixed before you go to market.

The businesses that sell for the most aren't always the most profitable. They're the ones that can prove they're profitable.