Beyond our profit and loss statement, what balance sheet cleanup needs to occur two years before going to market to prevent buyers from chipping away at our enterprise value?

Question

Tyler Smith · Accepted Answer

Most owners obsess over growing adjusted EBITDA on the income statement while ignoring the balance sheet. During due diligence, institutional buyers scrutinize every asset on your balance sheet to justify purchase price discounts or clawbacks via net working capital calculations.

Start with your accounts receivable. If you are carrying receivables past ninety or one hundred twenty days that you have been unwilling to write off, clean them up immediately. A buyer will classify these as uncollectible, write them off for you, and use them as evidence that your credit controls and revenue quality are poor. Enforce strict collection cadences on your weekly Scorecard.

Next, audit your inventory and work in progress. Scrap obsolete materials, write down slow-moving stock, and establish clear inventory valuation policies. Buyers will not pay for dead inventory sitting in a warehouse, and carrying it artificially inflates your working capital baseline, costing you cash at closing.

Third, review vendor payables and accrued liabilities. Ensure all accrued payroll, paid time off, sales taxes, and warranties are properly recorded under accrual accounting standards. Unrecorded liabilities discovered by a buyer during quality of earnings will be deducted dollar-for-dollar from your final cash proceeds.

A clean, audited balance sheet demonstrates operational hygiene. When your assets are real and your liabilities are transparent, buyers have fewer levers to re-trade the deal before closing.