How do we clean up our financial statements so a potential buyer sees the true profitability of the company rather than our tax-optimized books?

Question

Tyler Smith · Accepted Answer

Many closely held business owners run personal expenses through their companies to minimize their tax liabilities. While this is common, it obscures the true earning power of your business during an acquisition. To prepare for a clean exit, you must normalize your earnings to show your true Adjusted EBITDA. This requires working with an experienced financial professional to identify and document all owner discretionary expenses. These include items like your personal vehicle leases, family members on the payroll who do not work in the business, and above market salaries. You must also normalize any one time expenses, such as a major lawsuit or a unique capital investment. Start this normalization process at least two to three years before you plan to sell. When you present clean, audited, or reviewed financial statements with a clear schedule of adjustments, you make it easy for the buyer to see the actual cash flow. This transparency reduces transaction risk and helps you defend a higher valuation multiple.