Preparing to sell a business is often described as a valuation exercise. In practice, it is far more a credibility exercise.
For most buyers, financial statements are more than a record of past results. They are how buyers judge risk, scalability, and value. Even strong businesses can struggle in a sale process if their financials are unclear, inconsistent, or overly adjusted. On the other hand, companies with modest growth but clean, well-prepared financials often perform better than expected in competitive processes.
This guide outlines how owners should prepare their financial statements ahead of a sale, explains the role of adjusted EBITDA, and highlights common mistakes that can weaken buyer confidence and valuation.
Why Financial Preparation Matters
Buyers rely on financial statements not just to understand historical performance, but to assess risk, sustainability, and control. In many cases, financials form a buyer’s first impression of how well a business is managed.
When statements are clear, consistent, and thoughtfully prepared, buyers gain confidence early. When they are confusing or heavily adjusted, buyers assume risk – and price it accordingly.
Why Financial Preparation Matters
Clean financials signal three things’ buyers care deeply about:
- Reliability: Can we trust the numbers?
- Repeatability: Is performance sustainable?
- Transferability: Will results hold after the founder steps back?
Financial statements that clearly answer these questions shorten diligence, reduce friction, and support stronger outcomes. They allow buyers to focus on opportunities rather than uncertainty.
What Buyers Expect to See
At a minimum, buyers expect at least three years of historical financials presented consistently across periods, typically including:
- Income statements
- Balance sheets
- Cash flow statements
Just as important as the numbers themselves is how they are presented. Buyers look for:
- Consistent accounting policies across periods
- Clear revenue recognition and cost classification
- Logical working-capital trends
- Reconciliations between management reports and tax filings
Discrepancies don’t automatically kill deals – but unexplained ones create delays, skepticism, and negotiating leverage for buyers.
Buyers are not simply validating numbers – they are evaluating whether the business can perform the same way without the current owner.
The Role of Adjusted EBITDA
Adjusted EBITDA is central to most middle-market transactions. It is also one of the most misunderstood and frequently misused metrics in a sale process.
At its core, adjusted EBITDA is meant to show the normalized, ongoing earning power of the business under a new owner. Used correctly, it helps buyers understand true cash flow. Used poorly, it raises doubts about credibility. Buyers are not opposed to adjustments; they are opposed to unsupported adjustments.
Common, Defensible Adjustments
Buyers generally accept adjustments that are:
- Non-recurring: One-time legal costs, settlements, or unusual repairs
- Non-operating: Personal expenses run through the business
- Ownership-specific: Excess compensation, discretionary benefits, or family payroll that will not continue
Each adjustment should be clearly explained, supported by documentation, and treated consistently across periods. Well-supported adjustments build trust; poorly supported ones erode it.
Where Adjusted EBITDA Goes Wrong
Problems arise when adjustments drift from normalization into optimism. Buyers are wary of:
- “Future savings” not yet realized
- Cost reductions with no clear execution plan
- Revenue add-backs tied to unsigned contracts or verbal commitments
- Adjustments that appear for the first time during the sale process
As a rule of thumb, if an adjustment requires a long explanation, buyers are likely to discount it – or ignore it entirely.
Common Pitfalls That Undermine Value
Even well-run businesses fall into avoidable traps during financial preparation. The most frequent issues include:
Inconsistent Reporting
Changes in expense classification or accounting treatment across years raise questions about comparability and control.
Blurred Personal and Business Expenses
Personal expenses are common in private companies, but failing to clearly separate them creates friction during diligence.
Weak Balance-Sheet Discipline
Buyers focus heavily on working capital. Unexplained swings in receivables, payables, or inventory often leads to aggressive working-capital pegs or purchase-price adjustments.
Over-Adjusted Financials
Too many add-backs suggest earnings are not reliable. Buyers prefer a smaller number they trust over a larger one they don’t.
Rushed Preparation
Trying to clean up financials after going to market often leads to errors, restatements, and avoidable credibility issues.
How to Prepare Financials the Right Way
Effective preparation is less about financial engineering and more about clarity and consistency. The goal is not perfection – it is preparedness. Best practices include:
- A clean historical P&L with clearly labeled adjustments
- A simple, defensible bridge from reported EBITDA to adjusted EBITDA
- Support schedules for revenue, margins, and key expense categories
- A clear explanation of working-capital trends and seasonality
- Alignment across management reporting, tax filings, and diligence materials
Done well, this work supports valuation, speeds up the process, and improves negotiating leverage.
Timing Matters
Owners often ask whether they should “wait for a better year” before selling. In many cases, preparation matters more than timing.
When financials clearly show earnings quality and sustainability, buyers will price in future growth. When they don’t, even a strong year may not translate into value.
Preparing early gives owners options: to sell, to wait, or to grow further – on their own terms.
A Final Thought
Buyers don’t expect perfection. They expect transparency, logic, and consistency.
Financial statements that tell a clear, well-supported story – grounded in disciplined adjustments and thoughtful preparation – allow buyers to focus on the opportunity rather than the risks. For owners, that clarity often translates into faster processes, stronger competition, and better outcomes.
Preparing your financials isn’t just about being ready to sell. It’s about understanding how your business will be evaluated, where questions are likely to arise, and how to address them before they become negotiating points.
For owners considering a sale – now or in the future – an early, objective review of financial readiness can materially change the outcome. With the right preparation and guidance, Harney Capital helps owners turn financials into a source of leverage rather than friction, approaching a transaction with confidence, clarity, and control. Long before a process begins, the work done behind the numbers often determines the result.
