How clean do my financials really need to be before we start the due diligence process?

Question

Tyler Smith · Accepted Answer

They need to be bulletproof and utterly transparent. Buyers have a natural instinct to probe, refine, and simplify information, behaving much like the conative Fact Finder index. If your financials are messy, or if your personal life is deeply integrated with the business cash flow, buyers will assume the worst and discount your valuation or walk away.

Clean financials mean you have clearly separated business operations from owner-only perks and adjustments. You must be able to present a clear Capitalization of Earnings and historical trends without a mountain of complicated add-backs that look like creative accounting.

Start by auditing your general ledger at least two years before you plan to go to market. Eliminate the owner-related expenses that do not contribute to core business operations. If you pay your family members, run personal vehicles through the books, or prepay expenses to lower your tax burden, stop doing it.

Your goal is to present a clean, standardized set of books that any outside accounting firm can easily digest during due diligence. When you make the data undeniable, you eliminate the information asymmetry that buyers use to negotiate your price down.