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If you’re considering selling your business in the next one to three years, it’s important to start planning now. One of the most impactful areas to focus on is your company’s financials. Whether you're exploring a full exit, partial sale, or merger, prospective buyers will rigorously evaluate your financial statements and reporting processes to assess value, risk, and growth potential.
Even if your business is strong and running smoothly, certain financial issues can raise red flags for buyers and potentially derail your transaction. Identifying these risks early—and taking action—can significantly increase your chances of a successful and profitable sale.
1. Revenue Trends That Raise Concerns
Buyers are looking for predictable performance—not large swings in revenue. Even if your overall revenue is growing, sporadic drops can indicate issues with customer demand, retention, accounting, or operational stability.
What you can do:
Review your monthly revenue for the last three years. Is it consistent without major declines or fluctuations? If there are dips, investigate the cause. Can you attribute them to seasonality or pricing changes? Documenting and explaining these trends can help buyers better understand your business model and projections.
2. Flat or Shrinking Profit Margins
Top-line growth doesn’t tell the whole story. Buyers will look closely at EBITDA—earnings before interest, taxes, depreciation, and amortization—to understand how much your business actually earns. If your revenue is stable but profit margins are declining, it can point to inefficiencies or mismanaged costs.
What you can do:
Analyze your monthly expenses. Are they tracking with your revenue? Calculate your Cost of Goods Sold and SG&A as a percentage of revenue. If some months stand out, look for explanations: Were there one-time costs? A capital expense that wasn’t capitalized correctly? Or are rising costs a trend that calls for pricing adjustments? Understanding your margin trends gives you a roadmap for improving performance.
3. Discretionary Spending That Distorts Profitability
Most owners run some personal or discretionary expenses through the business—vehicles, travel, memberships, or family salaries. While common, excessive use of these 'add-backs' can make it difficult for buyers to get a clear picture of your company’s earnings potential.
What you can do:
Prepare a thorough add-back schedule that details all discretionary or non-operational costs. This will allow buyers to assess the true profitability of your business and may result in a higher valuation.
4. Disorganized Financial Records
Perhaps the most damaging financial issue is poor recordkeeping. If your financials are incomplete, inconsistent, or use non-standard accounting methods, buyers may question their reliability—or walk away entirely.
What you can do:
If needed, bring in a full-time accounting professional to clean up your records and establish consistent monthly reporting. Use either cash or accrual accounting methods—but apply them consistently. If your sale is more than a year away, consider having your annual financials reviewed or audited. For a sooner sale, invest in a sell-side Quality of Earnings report to uncover and address any discrepancies from GAAP.
5. Customer or Supplier Dependence
Relying on just a few customers or vendors introduces risk. If losing one key relationship would significantly impact your operations, that’s a red flag for buyers.
What you can do:
Look at your top 15–20 customers and vendors. Does any customer account for more than 20% of revenue? Do you have alternatives for your top suppliers? Diversification matters. If concentration exists, provide context—such as strong contractual terms or industry norms—to reduce perceived risk.
6. Outdated or Overstated Assets
Inflated inventory or equipment values can misrepresent your company’s health. Buyers want to know they won’t need to inject capital just to maintain performance.
What you can do:
Take a realistic look at your balance sheet. Adjust inventory values and establish reserves as needed. Ensure your equipment is in good condition and prepare a schedule outlining any assets that will need to be replaced within five years. Transparency around asset value can increase buyer confidence.
7. Undisclosed Liabilities
Pending lawsuits, environmental issues, or tax debts can delay—or kill—a deal if discovered late. These contingent liabilities are serious concerns during due diligence.
What you can do:
Be transparent. Disclose known liabilities early and provide documentation showing how they’re being handled. Surprises in diligence can erode trust and disrupt your timeline.
8. Tax Compliance Issues
Buyers will examine your business tax filings—including income tax, sales and use tax, and employment taxes. Late filings or underpayments can create exposure and risk for new owners.
What you can do:
Work with your CPA to ensure your filings are accurate and up to date. Resolve delinquencies and prepare to explain any past discrepancies. Clean records will demonstrate that your business is well-managed and reduce buyer concern.
Strong Financials Lead to Stronger Deals
The sale of your business is one of the biggest events in the life cycle of your company. It’s an exciting time, but understanding buyer expectations in advance of embarking on that journey can be key to a successful exit. Buyers want to see clean, consistent, and accurate financials that are a true reflection of a company’s performance. By identifying and addressing these financial issues early, you will not only make your business more attractive to buyers—you’ll also improve its valuation and strengthen your negotiating position and have a clearer path to closing.
If you're planning to sell within the next 1–3 years, now is the time to act. PCE’s Exit Readiness Assessment can help you identify financial issues, address buyer concerns, and position your company for a successful transaction.
Nicole Kiriakopoulos
Nicole Kiriakopoulos is a Director at PCE, supporting clients through buy-side and sell-side M&A transactions. With nearly 20 years of experience and a focus on facility services, she has advised on more than 100 deals totaling over $1 billion in value.
