Why this matters

Accurate financials turn opinion into evidence. Buyers, investors, lenders and counter-parties rely on financial statements to test assumptions, value a business, and set deal terms. Poor or inconsistent records slow negotiations, reduce trust and can lower offers. In my practice working with buyers and sellers, clean, prioritized statements shorten due diligence and improve outcomes.

Key documents to prepare

  • Income statement (historical and trailing 12 months)
  • Balance sheet (current and comparative periods)
  • Cash-flow statement (operating, investing, financing)
  • Supporting schedules: accounts receivable aging, inventory roll-forwards, fixed-asset register
  • Recent tax returns and bank statements
  • Pro forma/forecast (12–36 months) with key assumptions and sensitivity scenarios

Step-by-step checklist

  1. Reconcile and clean source data — bank accounts, payroll, invoices and tax filings. Discrepancies are an immediate red flag. (See FASB guidance for GAAP alignment.)
  2. Remove or footnote non-recurring items — owner draws, one-off gains/losses, litigation settlements — and present normalized earnings. Buyers value Adjusted EBITDA for comparability.
  3. Prepare concise supporting schedules that explain major balance-sheet movements (AR, inventory, payables).
  4. Create a simple projection with assumptions and at least two sensitivity cases (base, downside). Label material assumptions clearly.
  5. Build an executive summary (1–2 pages) that highlights value drivers, working-capital needs and covenant concerns.
  6. Package source documents for due diligence: bank statements (90–180 days), tax returns (2–3 years), signed contracts, and cap table or ownership records.

Normalization and common adjustments

  • Normalize owner compensation to market rate so EBIT/EBITDA reflects operational performance.
  • Remove related-party transactions unless they will continue post-transaction.
  • Capitalize or expense consistently according to GAAP/FASB rules; disclose policy choices.
  • Adjust for seasonal timing in revenue and working capital needs.

Presenting financials during negotiation

  • Lead with a one-page snapshot: revenue trend, normalized EBITDA, free cash flow, and required working capital.
  • Use charts to show trendlines and a table with historical vs. normalized metrics.
  • Anticipate the buyer’s focus: cash conversion cycle for acquirers, debt-service coverage for lenders, growth drivers for investors.
  • Provide access-controlled data rooms for documents; track who accesses files and when.

Practical tips from experience

Common mistakes to avoid

  • Giving raw accounting outputs without reconciliations or explanations.
  • Hiding unusual items instead of disclosing and explaining them.
  • Over-optimistic projections with no downside case.
  • Failing to update statements within 30–90 days of negotiations.

Example deliverables (what buyers expect)

  • Clean financial package: 2–3 years of financial statements + YTD, normalized EBITDA schedule, cap table, tax returns, and a 12–36 month forecast with assumptions.
  • Data room organized by folder with a simple index and contact for questions.

When to bring in professionals

Engage a CPA, a transaction accountant, or an M&A advisor early if the deal size or complexity warrants it. A third-party review or compilation can add credibility and speed negotiations. Professional help is particularly valuable for valuation adjustments, tax implications and covenant language.

Authoritative sources and standards

  • Financial Accounting Standards Board (FASB) for GAAP and accounting policy guidance (www.fasb.org).
  • Small Business Administration (SBA) guidance on loan documentation and projections (www.sba.gov).
  • IRS information on records and tax returns (www.irs.gov). These sources inform best practices but don’t replace professional accounting advice.

Professional disclaimer

This entry is educational and not individualized financial advice. Consult a licensed CPA or financial advisor for guidance tailored to your transaction and to confirm current reporting requirements.