Guide
Getting the records ready before any valuation
Updated
Unreliable records do not produce a lower valuation. They produce an unreliable one, and buyers discount unreliability harder than they discount low profit, because they cannot size what they cannot see.
Separate, then evidence
Personal spending run through the business has to come out, and each item has to be evidenced. An add-back a buyer cannot verify is one they will not accept, and a schedule of unverifiable add-backs damages the credibility of the ones that are real.
Related-party items deserve their own list: rent paid to an entity the owner controls, vehicles, family members on the payroll, and any loan between the business and its owner. All of them are normal and all of them get examined.
Normalise the owner's pay
Restate the owner's compensation to what the role would cost on the open market. This is the adjustment that converts seller's discretionary earnings into EBITDA, and it decides which approach applies to the business at all.
It works in both directions and both are common. An owner paying themselves nothing has overstated earnings by the cost of the role. An owner paying themselves well above market for tax reasons has understated them.
Reconcile to the tax returns
The returns are the document a buyer trusts most, because they were filed under penalty and can be independently confirmed. Management accounts that do not tie to them raise a question that has to be answered anyway, so answer it in advance.
Every difference should have a written explanation. The explanations are usually mundane, and the absence of them is not.
Three years, and why the timing matters
Get at least three years onto a consistent basis. One clean year following two messy ones reads as a tidy-up rather than a trend, and a buyer will treat it as one.
That is why twelve months before a sale is the target rather than twelve days. The same work makes diligence shorter and less adversarial, which is worth something separate from the valuation: deals fall over in diligence far more often than they fall over on price.
One thing to settle before the price
How the eventual consideration will be allocated across the assets. IRS guidance states that the sale of a business usually is not a sale of one asset, that each asset is treated as being sold separately for determining the treatment of gain or loss, and that both the buyer and the seller must use the residual method to allocate the consideration.
Buyer and seller do not have identical interests in that allocation, and discovering it after the price is agreed converts a settled deal into a renegotiation. It belongs in the discussion at heads of terms, not at signing.