Prepare Financials for a Business Sale: Boost Value & Buyer Trust

Key Details

A well-structured accounting foundation is critical for any business owner considering a sell-side transaction. From ensuring accurate financial reporting to strategically managing tax implications, having organized records can not only increase a company’s value but also streamline the due diligence process. Addressing potential issues early—such as nonrecurring expenses or inconsistent bookkeeping—demonstrates credibility and reduces surprises that might derail negotiations. Ready to optimize your transaction approach? Explore how Ryan & Wetmore’s transaction advisory services can support your business.

Evaluate & Clean Up Current Accounting Practices

Inconsistent Records & Compliance Gaps

Before putting a business on the market, it’s vital to ensure that financial statements are complete, consistent, and compliant with the relevant accounting standards (e.g., GAAP). Missing documentation or irregular bookkeeping practices can quickly erode buyer confidence, extend due diligence timelines, and potentially reduce a company’s valuation. Early detection and remediation of these issues can help avoid last-minute surprises that weaken the seller’s negotiating position.

Potential Pitfalls:

• Incomplete transaction records
• Out-of-date ledgers
• Outdated accounting policies that rely on non-GAAP methods like cash or tax basis accounting

Remediation Tips:

• Before going to market, conduct a sell-side financial due diligence or a thorough internal review of financial statements to identify and fix discrepancies before buyers do.
• Standardize revenue recognition and expense categorization methods to ensure consistency.
• Update or replace obsolete accounting software and procedures so that all future financial reporting remains accurate and traceable.

Internal Controls & Documentation

In addition to cleaning up existing records, sellers should establish clear internal controls. Well-documented protocols for approvals, expense management, and revenue recording can reassure buyers that the company’s finances are managed responsibly and systematically. Conversely, weak or ad hoc processes raise doubts about the reliability of the company’s financial statements. Strong internal controls reduce the risk of fraud or material misstatements, both of which can undermine a deal’s success.

Potential Pitfalls:

• Lack of written accounting policies and procedures
• No segregation of duties
• Unrestricted access to accounting systems
• Incomplete employee records

Best Practices:

• Create written policies for accounts receivable, accounts payable, and payroll to ensure everyone follows uniform processes.
• Incorporate checks and balances (e.g., dual sign-off requirements for high-dollar expenses) to minimize errors.
• Maintain a comprehensive audit trail so that external auditors and prospective buyers can easily verify transactions.

By addressing these elements proactively, sellers position themselves as trustworthy partners in a transaction—boosting credibility, expediting due diligence, and laying the groundwork for a smoother, more rewarding M&A process.

Prepare Clear & Accurate Financial Reporting

Importance of Transparency

Potential buyers and investors place significant weight on the clarity and reliability of a company’s financial statements. When revenue, expenses, and cash flow data are well-organized and consistently reported, it signals operational maturity and reduces perceived risk.

• Credibility & Confidence: Transparent reporting showcases the true financial health of the business, instilling confidence that management is both honest and capable.
• Streamlined Due Diligence: Buyers can review and verify standardized data more quickly, helping maintain momentum through the transaction process.

Segregating One-Off Items

One-time expenses or extraordinary revenues can mask the true earnings potential of a business. Normalizing financials by adjusting for these anomalies ensures buyers see sustainable income levels from the core business operations of the company.

Examples of One-Off Items

• Legal settlements
• Restructuring charges
• Significant R&D outlays
• Large asset sales

Benefits of Normalizing

• Presents a realistic snapshot of ongoing profit margins and operating expenses.
• Avoids protracted negotiations over whether certain charges—or income sources—truly reflect the business’s core financial performance.

Use of Quality of Earnings (QoE) Reports

A QoE report goes beyond standard financial statements to provide an independent assessment of a company’s revenue streams, expense structure, and overall economic viability. Although QoE reports are typically commissioned by buyers, savvy sellers are increasingly preparing their own to frame the narrative and minimize surprises.

What a QoE Covers

• Verifies revenue recognition methods.
• Evaluates expense allocations and one-off items.
• Highlights any discrepancies or red flags in the accounting methods.

Value for Sellers

• Demonstrates transparency and thoroughness, which can increase buyer trust.
• Identifies adjustments that might improve valuation prior to entering formal negotiations.
• Prevents surprise EBITDA adjustments from the buyer’s due diligence process.

Prioritizing transparent reporting, isolating nonrecurring events, and leveraging tools like Quality of Earnings reports, helps sellers present an accurate financial portrait that reinforces trust and positions their business for a smoother, more lucrative transaction.

Manage Working Capital & Operational Efficiency

Normalized Working Capital Targets

Working capital—current assets minus current liabilities—often features prominently in purchase agreements. Buyers will want to see that your company’s day-to-day liquidity is stable and that sudden spikes or dips in working capital are explainable. Because most transactions are “cash-free, debt-free”, it is important to also track Net Working Capital, which excludes cash and short-term debt.

Why It Matters

• Pricing Adjustments: Many purchase agreements include a working capital target or “peg”. The final purchase price may be adjusted based on deviation of working capital at close from this target.
• Transaction Smoothness: Large fluctuations in receivables, payables, or inventory can raise red flags during due diligence.

Practical Steps

• Review Historical Trends: Present buyers with consistent monthly or quarterly working capital reports to highlight stability.
• Anticipate Seasonal Swings: Document cyclical trends (e.g., seasonal sales surges) to explain any short-term spikes in inventory or receivables.
• Plan for Changes: Avoid extraordinary outlays, such as bulk inventory purchases, close to the deal unless they’re well-justified and disclosed.
• Compare Net Working Capital to Expenses: Calculate how many days of expenses working capital and net working capital can fund. This metric is often used to inform the working capital peg.

Inventory & Receivable Management

Tight control over inventory and receivables can dramatically affect both cash flow and perceived operational efficiency. By showing disciplined management of current assets, sellers demonstrate strong business fundamentals.

Inventory Strategies

• Reduce Excess Stock: If you carry aged or obsolete items, offload them before negotiations to clear your balance sheet of potential write-downs.
• Refine Forecasting: Better demand planning avoids tying up capital in unused inventory.

Receivable Best Practices

• Implement Clear Payment Terms: Shortening days sales outstanding (DSO) helps improve cash flow and buyer confidence.
• Enforce Collection Procedures: Prompt invoicing and follow-ups reduce late payments and doubt about revenue realization.

Address Tax & Transaction Structuring Early

Asset vs. Stock Sale

One of the most crucial decisions in any sell-side transaction is whether to structure the deal as an asset sale or a stock sale.

• Seller’s Perspective: Sellers generally prefer stock sales because proceeds typically qualify as capital gains, resulting in lower tax rates and simplicity in the transaction.
• Buyer’s Perspective: Buyers typically prefer asset sales for the potential “step-up” in asset basis, yielding future depreciation or amortization tax benefits.

By considering these dynamics up front—and running projections under different structures—sellers can set realistic expectations and negotiate more effectively.

Entity-Specific Considerations

Tax obligations and legal ramifications vary widely depending on the entity type (e.g., C-corp, S-corp, LLC, or partnership).

• S-Corps: May face built-in gains tax if assets are sold soon after converting from C-corp status.
• LLCs and Partnerships: Pass-through taxation can be advantageous but also introduces unique complexities around member exit.

Understanding the nuances of each structure helps avoid unpleasant surprises and optimizes net proceeds.

Engage Experienced Advisors

From reconciling financial statements to structuring a tax-efficient deal, experienced CPAs and tax consultants can be pivotal for sellers aiming for a smooth, profitable exit. By performing transaction advisory services such as modeling different sale scenarios and forecasting tax liabilities, these professionals help you make informed decisions while ensuring the accuracy and reliability of financial data to expedite buyer reviews and build credibility.

Alongside accounting and tax specialists, M&A attorneys and valuation experts complete the advisory team: skilled counsel drafts and reviews purchase agreements, handles regulatory filings, and safeguards legal interests, while valuation professionals provide independent assessments of a company’s worth to reinforce negotiation positions. Working with a well-rounded firm like Ryan & Wetmore unites these capabilities under one roof, creating a cohesive process and offering a complete picture of your options and obligations from start to finish.

Conclusion & Action Items

Even after a deal has closed, issues can arise that may jeopardize the value created during the sale—ranging from tax disputes to post-transaction adjustments. Properly documented processes, transparent financials, and well-considered legal frameworks help mitigate these risks and set the stage for a smoother post-acquisition phase. By proactively addressing the accounting, tax, and operational concerns highlighted throughout this guide, you strengthen your negotiating position and reduce the likelihood of surprises down the road. For more insights on preventing or managing post-acquisition disputes, check out our article dedicated to this topic.

Action Items

• Clean Up Financials
  • Resolve incomplete records and standardize accounting policies.
  • Implement robust internal controls to enhance reliability.
• Ensure Transparent Reporting
  • Separate one-off items to present “normalized” earnings.
  • Consider a Quality of Earnings (QoE) report to validate financial data.
• Optimize Working Capital
  • Monitor and document fluctuations in receivables, payables, and inventory.
  • Align your working capital levels with buyer expectations.
• Plan for Tax & Transaction Structure
  • Model the impact of asset vs. stock sale scenarios early.
  • Understand entity-specific nuances to avoid hidden pitfalls.
• Assemble an Expert Advisory Team
  • Engage CPAs, tax professionals, attorneys, and valuation specialists.
  • Coordinate efforts so every aspect of the transaction is covered.

For personalized guidance on preparing your business for a sell-side deal, explore Ryan & Wetmore’s transaction advisory services. Our experienced team stands ready to help you navigate everything from financial clean-up to tax structuring—ensuring a seamless and profitable exit.

Today’s Thought Leaders

About Samad Arouna

Marketing Coordinator

Samad Arouna is the Marketing Coordinator at Ryan & Wetmore, bringing a wealth of knowledge in digital marketing strategy and analytics. Before joining Ryan & Wetmore, Samad honed his skills working as a loan specialist for the Small Business Administration. He holds a Bachelor of Business Administration and a Master of Science in Marketing. Samad is dedicated to devising innovative marketing solutions that drive growth and success for the firm.

About Ben Mendel

Senior Consultant

Ben Mendel is a Senior Finance Consultant at Ryan & Wetmore. He focuses on Transaction Advisory Services and Financial Planning & Analysis for clients across multiple industries. Ben graduated from the University of Virginia with a Bachelor of Science in Systems Engineering, concentrating on economic and financial systems, as well as a minor in engineering business.