Are you prepared for the financial and operational scrutiny of a business sale?

In every transaction, there comes a moment when optimism meets scrutiny. The buyer has signaled interest, perhaps even hinted at terms, but now the conversation shifts to proof. They will want to see the numbers behind the story, the contracts that bind relationships, and the systems that keep the business running. They may also review IT infrastructure, reporting capabilities, and operational workflows to ensure the business can support its projected performance.

Financial and operational due diligence is where that inspection happens. It is the buyer’s way of confirming what has been presented, uncovering risks, and identifying any adjustments to the deal. For the seller, it is both an administrative test and a measure of credibility. The quality of your preparation can decide whether negotiations move forward or stall and whether the final price reflects the business’s true value. Early preparation can also help prevent delays caused by financial information that isn’t presented in a manner meaningful to a buyer or creates unnecessary questions.

Getting Ready for Buyer Scrutiny

Once a potential buyer signals interest, the clock starts ticking. Their team will begin assembling a checklist of financial, operational, and legal items to review, often requesting information on short notice. This stage can feel intense, as questions may reach deep into accounting methods, contract terms, employee agreements, and even IT capabilities. The goal is to confirm the stability of revenues and operations, test projections, and assess whether the business can deliver on its promises after the sale. Sellers who anticipate these requests and prepare supporting documentation in advance are better positioned to maintain momentum and protect valuation.

Anticipate Questions Before They Arise

Buyers and investors look at more than recent profit. They will expect clear financial statements, reconciled accounts, and an explanation of accounting methods. They will want to see historical performance, projections, customer details, and any significant fluctuations in revenue or expenses. Unusual transactions, such as large one-time legal costs or shifts in commission timing, should be explained in advance. Buyers may also request detailed operational data, including inventory tracking, recurring revenue by client or region, and intercompany transactions.

They may also examine vendor and customer agreements, paying close attention to change-of-control clauses that may give clients or suppliers an opportunity to alter terms after a sale. Employee agreements, tax compliance, and corporate structure will also be reviewed. For businesses with multi-state operations or foreign entities, buyers will expect proof of compliance and clear explanations of how these structures affect cash flow and risk.

AAFCPAs advises that sellers review these items before entering the market to avoid expectation gaps that can slow or reduce a deal. Buyers often ask for operational data your accounting system may not easily produce, such as customer revenue by region, decision-maker, or product line. If current reporting cannot produce these details, it is better to address that gap before due diligence begins.

A well-prepared Quality of Earnings (QofE) report can be critical here. In our work with sellers, AAFCPAs prepares QofE Lite reports that present financial results in the formats buyers can understand, separate recurring from nonrecurring revenue, normalize owner compensation, and explain or add back to net income any unusual items. By surfacing questions and clarifying adjustments early, the seller can guide the conversation rather than react to it during a buyer’s review. AAFCPAs advises that sellers begin the process before going to market so the information memorandum and related materials reflect understandable, fully vetted financial and operational data. This also positions the seller to proactively address potential issues that could slow or jeopardize the deal.

Avoid Common Deal-breakers

Transactions often slow or fall apart because sellers wait too long to prepare. If books are incomplete or maintained by in-house staff without transaction experience, buyers may need to restate results or provide more in-depth responses, creating delays and lowering trust.

Issues that frequently require attention before a transaction include:

• Accrued liabilities such as PTO, bonuses, and commissions.
• Inventory valuation and counts, especially if discrepancies appear during review.
• Intercompany loans or expenses between related entities.
• Officer compensation that differs from market rates.
• Personal expenses run through the business that should be removed.
• Customer concentration risk, where revenue depends on a few clients.
• Tax exposure in multiple jurisdictions or with foreign entities.

Due diligence will also lead to terms in the Purchase Agreement. It’s important to seek expertise in transaction advisory to assist with complexities, like Earn-outs and Net Working Capital, which will be included in future articles.

This article is part of AAFCPAs’ ongoing guidance for owners navigating business transitions.

How We Help

AAFCPAs’ Business Transaction Advisory practice helps clients make informed decisions and execute transactions through all stages of the deal cycle. Our multi-disciplinary team provides guidance on buy-side, sell-side, and internal transactions, helping clients manage risk, clarify financial and operational information, and prepare for buyer or investor scrutiny. For sellers, this includes Quality of Earnings (QofE) Lite reports that separate recurring from nonrecurring items, normalize owner compensation, and identify potential questions before materials are shared with buyers. We also assess IT systems, operational workflows, inventory management, intercompany transactions, and multi-state or foreign entity compliance to anticipate due diligence inquiries and ensure accurate, complete presentation of financial and operational data.

Our team combines CPAs, Certified Merger & Acquisition Advisors, exit planning advisors, tax attorneys, consulting CFOs, and wealth advisors. Leveraging the depth of our 350+ person firm, we offer responsive, multi-dimensional support across tax, finance, and operational areas to help clients execute transactions efficiently, assess risks, structure deals for optimal outcomes, and integrate post-transaction processes. AAFCPAs advises that sellers begin preparation early to present fully vetted information, anticipate potential questions, and maintain momentum throughout the transaction.

These insights were contributed by Janice O’Reilly, CPA, CGMA and Partner, Richard Weiner, CPA, MST, CM&AA, Tax Partner.

Questions? Reach out to our authors directly or your AAFCPAs partner.

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