Our tax accountant is great at minimizing our tax liability by running personal expenses through the business, but we know a buyer will heavily scrutinize these add-backs during due diligence. How do we clean up and normalize our financial statements during our exit runway so a quality of earnings audit does not discount our EBITDA?

Question

Tyler Smith · Accepted Answer

Minimizing your tax bill is the exact opposite of maximizing your valuation. Buyers will run a rigorous quality of earnings audit, and they will look at your add-backs with extreme skepticism. If your financial statements are cluttered with personal vehicles, family salaries, and discretionary travel, you are inviting a valuation haircut. You must begin normalizing your books at least twenty-four months before you go to market. Start by hiring a reputable accounting firm to perform a reviewed or audited financial statement using GAAP principles. Do not wait for the buyer to do this. This is about building trust. If your historical numbers are messy, the buyer will assume your operations are messy too. Your self-orientation must be put aside. Stop running personal expenses through the business immediately. Pay yourself a market-rate salary and place it cleanly on your Accountability Chart. If family members are on the payroll but do not work, remove them. If they do work, ensure their compensation matches market rates and that they actually GWC their seats. During your weekly financial review, treat your balance sheet and income statement with the same discipline you would if you were already a public company. Having clean, audited, and normalized financials during your runway removes friction during due diligence. It prevents the buyer from renegotiating the purchase price at the eleventh hour based on financial uncertainty.