We need to clean up our financials on our exit runway, but we are confused about how buyers view normalized earnings. How do we prepare our financial records so our adjustments and add-backs actually hold up?

Question

Tyler Smith · Accepted Answer

When preparing for a sale, your historical financial statements will face intense scrutiny. Buyers look for any excuse to claw back value or challenge your calculated EBITDA. To survive this process, you must clean up your general ledger and document every single adjustment or owner add-back with absolute precision.

An add-back is an expense that will not recur under new ownership, such as your personal vehicle, non-business travel, or above-market owner compensation. Do not wait until you are in due diligence to identify these items. Start keeping a rigorous, documented ledger of all normalized adjustments at least two years before you go to market.

Every adjustment must have a clear paper trail. If you claim your salary should be adjusted because you pay yourself above market rate, you must prove what a market-rate replacement would cost. If you run personal expenses through the business, stop doing it entirely or keep them meticulously segregated.

A buyer's due diligence team will dissect these numbers. If they find even one unverified or exaggerated add-back, they will lose trust in your entire financial reporting system. This loss of trust will lead to a retrade or a busted deal. Work with your financial team to ensure your monthly financials align perfectly with your operational scorecard, proving your reporting is airtight.