So, You Want To Sell Your Business?

If you’re like most business owners, your dream isn’t actually to run your business into eternity…it’s much more likely that you really dream of leaving your business. You want to retire, leave the business to family or employees, or sell to private equity or a new buyer, really. You put in the long hours, made it through economic highs and lows, and built something of value. After years of work and growing your business and you want to cash out and enjoy the rewards...you’re being told that your most valuable asset—the business itself—is nearly impossible to sell because of a single, avoidable problem.

This is the harsh reality for countless entrepreneurs who reach the end of their journey only to find their disorganized financial records have become a major deal-breaker. In the world of business acquisitions, a disorganized financial past is a major red flag that can scare off potential buyers, tank the valuation, and sabotage your future plans.

Here is a look at why getting your accounting in order is the single most important step you can take before putting your business on the market.

The Harsh Reality: Why Buyers Walk Away

Imagine you’re a potential buyer. You’re looking to invest a significant amount of money and time into a business. You’re prepared to take on hundreds of thousands in SBA debt, potentially a seller-financed note, as well as using your own cash. You need to see a clear, verifiable picture of financial health of the business. The asking price is based on the business's profitability and future potential, but without clean, consistent records, that price is just hypothetical.

Buyers and their due diligence teams look for clarity. They want to see predictable and consistent revenue, a stable profit margin, and have a clear understanding of all the assets and liabilities. If they’re given messy books—unreconciled accounts, missing receipts, or inconsistency across months, quarters, & years—it creates uncertainty at best, and at worst mistrust. This lack of transparency doesn’t just make a deal difficult; it suggests a fundamental lack of control and professionalism in the business itself.

For a buyer, clean books are a sign of a well-run operation. Inconsistent accounting books are a signal that the business is a bigger risk than it appears, and that risk will either lead them to walk away entirely or demand a significant price reduction to compensate for the uncertainty.

The Lender’s Gatekeeper: The SBA and Its Demands

Even if you find a buyer willing to look past your disorganized records, they will still face the ultimate gatekeeper: the lender. In the small business world, a majority of acquisitions are funded through a loan, and the Small Business Administration 7(a) loan is the most common. The SBA guarantees a portion of the loan, which makes it easier for banks to lend to small businesses, or buyers of existing businesses.

However, the SBA and its lending partners have strict requirements. They are not just interested in the buyer's creditworthiness; they are intensely focused on the financial viability of the business being acquired. The bank's underwriters scrutinize every detail to ensure the business generates enough cash flow to cover the loan payments.

For a bank to approve an SBA 7(a) loan, they will require a complete financial history of the business, typically for the past three to five years. This includes:

• Profit & Loss (P&L) Statements: These must be consistent and clearly show revenue and expenses year over year. A P&L that suddenly jumps or drops with no explanation is a red flag.

• Balance Sheets: Having a consistent snapshot of the business's assets, liabilities (payments owed), and equity is crucial for a lender to understand its overall financial health.

• Business Tax Returns: Lenders will require multiple years of tax returns from the owner and the business (depending on the situation) and will cross-reference them with your P&L statements. If there are major inconsistencies, they will jeopardize the deal.
  

Lenders need a verifiable audit trail. They need to see that your reported profits on the P&L match the figures on your tax returns. Discrepancies lead to a mountain of questions and requests for documentation that you may not have. The burden of proof is entirely on the seller, and a failure to provide it will result in the loan being denied.

The Impact on Valuation and the Cost of Disorganization

Simply put, a clean financial record is the foundation of a high valuation. When a buyer and a lender can easily verify your revenue, profit, and growth trends, they are far more likely to accept and pay your asking price. An organized business is a low-risk investment, and investors are willing to out-bid each other and even pay a premium for such low risk.

Conversely, a business with messy books will be valued much lower. Without verifiable proof of its financial performance, a buyer will likely offer a price based on the worst-case scenario. You may have to accept a steep discount—potentially tens of thousands of dollars or more—just to get the deal done. In some cases, the cost of being unorganized is more than what it would have cost to hire a professional bookkeeper or even fractional CFO for years.

Forbes Magazine cites research showing 70%-80% of businesses listed for sale…never sell. As a business owner, you owe it to yourself to get your books in order, avoid becoming one of the ~75% of business owners who leave their businesses empty-handed, and ensure the exit you may need for retirement or your next venture.

What to Do Now: A Checklist for Your Exit Strategy

The time to get organized is not when you find a buyer; it's right now. Consider this your checklist for a successful business exit:

1. Separate Business and Personal Finances: This is the golden rule. If you haven't already, open a separate business bank account and credit card for all business expenses. Stop co-mingling funds immediately.

2. Reconcile Accounts Monthly: Go through your bank and credit card statements and match every transaction to your accounting software. This ensures accuracy and catches errors or unrecorded transactions early.

3. Use Professional Accounting Software: Ditch the manual spreadsheets. Invest in a dedicated, cloud-based accounting platform like QuickBooks or Xero. They automate reconciliation, generate professional reports, and create an easily auditable paper/digital trail.

4. Hire a Professional: If you're not an expert, or don’t want to be…don't try to be one. Work with an accounting firm, a CPA, or a professional bookkeeper. They can ensure your books are accurate and compliant with all tax laws and help you get organized in a way that’s attractive to potential buyers.

5. Be Consistent: Ensure your reporting is consistent year over year. Don't change your accounting methods or major categories without clear, documented reasons.

   
   

The Final Reward

Every year, roughly 10,000 businesses are sold and find new owners. Finding the right buyer for your business is certainly achievable, it just requires preparation. The financial documents you create today are not just for tax season; they are the evidence that proves the value of your life’s work. By getting your accounting in order, you are not simply preparing for an audit—you are securing a higher valuation, attracting more qualified buyers, and ensuring a smooth, profitable transition into your next chapter.