Our books have historical owner-related expenses, personal vehicles, and family member salaries that we plan to add back to normalize our EBITDA. How do we clean these financials up during our runway so a buyer does not challenge our adjustments during due diligence?

Question

Tyler Smith · Accepted Answer

If you want to protect your valuation, you must stop treating your business like a personal piggy bank at least two to three years before you sell. While add-backs are a standard part of normalizing EBITDA, a long list of personal expenses raises immediate red flags for a buyer's due diligence team. It signals weak financial discipline and forces the buyer to question the integrity of your entire accounting system. Your goal during the runway is to present clean, audited, or reviewed financial statements that require minimal adjustments. Start by removing all non-business expenses from your general ledger immediately. Pay fair market salaries to any family members who actually work in the business, and transition those who do not off the payroll. If you use a personal vehicle or run personal travel through the company, stop. A key step is to hire a reputable accounting firm to conduct a sell-side Quality of Earnings report at least eighteen months before you market the business. This process will uncover any aggressive accounting policies, such as how you capitalize software development costs or recognize deferred revenue, before a buyer's analyst can use them to chip away at your purchase price. Remember, trust is the ultimate currency in a transaction. In the words of the trust equation, high self-orientation and low reliability destroy trust. Presenting a messy balance sheet with dozens of subjective personal add-backs shows high self-orientation. Clean up your books now so the buyer can focus on your strong margins instead of auditing your personal lifestyle.