Maximize Your Business Sale Value: Why Accurate Financials Matter

In this article:

• The Cost of Financial Unreadiness
• Prevent Common Red Flags
• Timeline for Transaction Readiness
• Prepare Your Business

Businesses considering a sale, merger, Unsolicited Friendly Offer (UFO), or even a partial sale in exchange for a significant outside investment typically hear one piece of advice: Ensure your books are in order. Clean, accurate, and up-to-date financial records are essential for transaction success, particularly as prospective buyers or investors demand greater transparency and detail during due diligence. At this time, buyers are often focused on financial accuracy and will pay particular attention to EBITDA—a measure of earnings before interest, tax, depreciation, and amortization—along with revenue and gross profit to gauge potential value and maximize their earn out. However, EBITDA accuracy depends on well-maintained books.

When records have been neglected, owners may face costly, last-minute clean-up and potential delays to satisfy buyer demand. But this level of financial overhaul may be avoided with routine upkeep. Not only does this provide financial readiness but it also leaves room for valuation negotiations.

AAFCPAs advises that clients take a proactive approach to business transaction readiness, recognizing that a sale requires extensive groundwork. This means maintaining accurate and up-to-date financial records, ensuring all accounts are reconciled, categorizing expenses correctly, and creating formal financial statements. It involves a proactive approach in consistently keeping the books in order to demonstrate financial health and integrity to potential buyers or investors. By laying this groundwork, a business can avoid last-minute, costly, and time-consuming financial cleanups, providing a smoother transaction process and enhancing its attractiveness and value to prospective parties.

The Cost of Financial Unreadiness

Consider a recent case study that highlights the financial and logistical challenges that come into play when records are not transaction ready. In this situation, a business owner with a successful, two-decade operation had spent several years seeking a buyer. While the business was profitable from a cash-in and cash-out perspective, its financial records were not able to accurately show profitability or present the current state of the business, leading to costly delays and multiple setbacks until the broker representing the sale uncovered a major issue: the company’s financials were incomplete, lacking a balance sheet, and showing only basic revenue and expense records on a cash basis. There were no reconciliations, so it appeared that there were negative cash account balances. Though there was cash in the bank, there was not clear insight into income or profitability. The company’s value was not apparent, jeopardizing buyer confidence and complicating negotiations.

Due to the lack of structured records, the business had to undergo an extensive, last-minute cleanup process to assemble accurate financial statements that could convey its true success. For years the company had relied on simple cash-basis financial reporting within QuickBooks without reconciling accounts or preparing any accrual-based balance sheets or conducting financial closes, so cash flow and profitability were unclear. The added burden in preparing these records not only extended the timeline of its sale but also risked the loss of buyer interest from those unwilling to wait. While the eventual buyer agreed to a purchase, the prolonged process highlighted the risk of a deal falling through due to poor recordkeeping.

In the end, this company was able to secure a higher sale price once accurate financial performance could be demonstrated. Yet, the ordeal illustrates how proactive financial preparation could have saved time, minimized costs, and preserved early buyer interest—potentially allowing for a quicker sale at a competitive price without the financial and logistical strain of last-minute corrections.

Prevent Common Red Flags

Inaccurate records, such as miscategorized expenses or unreconciled accounts, raise red flags, which may cause buyers to question a company’s financial integrity. A business might be forced to rapidly update years of inconsistent records simply to adhere to a buyer’s due diligence demands. This reactive cleanup approach often requires extensive hours from a specialized accounting team, transaction reclassifications, and detailed reconciliations—all of which add up in cost and time. Note that specialists often charge a premium for rush work. A proactive approach, on the other hand, demonstrates organizational reliability and positions a seller to negotiate a more favorable price.

Timeline for Transaction Readiness

While many owners might assume they will have ample time to clean up their books once they decide to sell, AAFCPAs advises that clients begin preparations at least two years before going to market in order to build a solid financial narrative. An early start provides the time to make necessary corrections and improvements, especially for smaller or family-owned companies that may lack the advanced financial systems used by larger corporations. Taking these steps early also ensures you complete this process before attorneys and business evaluators become backed up, which can slow transaction timelines and lead to missed opportunities.

The transaction process itself becomes smoother with well-organized books, minimizing disruptions due to last-minute reconciliations. Even for those not actively planning a sale, maintaining ready-to-sell financial records can yield cost benefits, as routine upkeep is often more affordable than an emergency overhaul.

Prepare Your Business

We understand how quickly transaction opportunities and challenges can arise and how these critical moments can influence your company’s short and long-term success. AAFCPAs’ Business Transaction Advisory team has 50 years of experience advising businesses managing and executing buy-side, sell-side, and internal transactions.

Further, our Outsourced Accounting and Fractional CFO (OAFC) practice provides essential financial oversite and records cleanup. Note that tax issues are among the most common items discovered during the due diligence process for both buyers and sellers. Our experienced tax professionals analyze tax issues and information that may affect a transaction, including compliance with federal, state, local, and international tax codes and regulations.

If you have questions, please contact Destiny J. Flood, CPA, Partner, Commercial Outsourced Accounting & Fractional CFO at 774.512.4151 or dflood@nullaafcpa.com, Julie Chevalier, CPA, Tax Partner, Stacie Amaral Field, CPA, MBA, Director, Tax at 774.512.4103 or sfield@nullaafcpa.com—or your AAFCPAs Partner.