When you sell a business, the buyer is paying for future earnings, and the only evidence of those earnings is your financial records. If the numbers are late, mixed with personal spending or hard to tie back to the bank and the tax returns, a buyer either lowers the price, pushes more of it into an earnout, or walks away. Most of that is fixable, but not in the month before a deal. This guide covers what to put in order, ideally 12 to 24 months before you go to market.
Key Takeaways
- Buyers pay for earnings they can verify. Profit they cannot trace to the books, the bank and the tax returns is usually discounted or pushed into an earnout.
- Start 12 to 24 months ahead: clean monthly closes, three years of consistent statements, and personal or one-off costs separated out.
- List every add-back with evidence. An add-back without a receipt, contract or invoice behind it rarely survives the buyer’s due diligence.
- Agree how working capital will be measured at closing, because it can move the final price up or down.
- In Texas, a buyer can be liable for the seller’s unpaid state taxes unless enough of the price is held back or a Comptroller Certificate of No Tax Due is obtained, so file and pay everything on time before you sell.
Why the books decide the price
A buyer, and the lender financing the buyer, will test every number you present. They compare your profit and loss statements with your bank statements and your filed tax returns, look at how revenue is earned and how reliable it is, and adjust for anything that will not continue after the sale. Each question they cannot answer from your records becomes a reason to lower the price or to hold part of it back. Clean, consistent records do not create value on their own, but they stop value being taken away.
What a buyer will ask for first
- Three years of financial statements (profit and loss, balance sheet, cash flow) plus the current year to date, prepared the same way each year.
- Three years of business tax returns, and a short reconciliation explaining any difference between book profit and taxable income.
- Monthly figures, so the buyer can see seasonality and trends rather than just annual totals.
- Revenue detail: sales by customer and by service line, and how much comes from your largest customers.
- Accounts receivable and payable aging, and any debt, leases or loans the business carries.
- Payroll records and how workers are classified, employee or contractor.
- Key contracts: customer agreements, supplier terms, property leases and anything that changes on a change of ownership.
Having these ready, organized and consistent before a buyer asks shortens due diligence and keeps attention on the business rather than on missing paperwork.
Step 1: Get to a clean monthly close
Every bank, card and loan account should be reconciled every month, and the books closed within a few weeks of month end. If the books are behind, catch them up first; nothing else on this list works without it. Many service businesses also benefit from moving from cash basis to accrual reporting before a sale, because it matches revenue and costs to the period they belong to and is how most buyers will read the numbers. Our guide to bookkeeping services explains what a clean month end looks like.
Step 2: Separate the owner from the business
Personal expenses run through the company, family members on payroll, a vehicle or a phone plan the business pays for: all of these are common, and all of them blur the true profit. The cleanest approach is to stop them well before a sale. Where they did happen in the years a buyer will look at, record them clearly so they can be identified and adjusted.
Step 3: Normalize earnings and document every add-back
Buyers value most businesses on normalized earnings: profit adjusted for items that will not continue under a new owner. Smaller owner-run businesses are often priced on seller’s discretionary earnings (SDE), larger ones on EBITDA. Typical adjustments include:
- Owner pay above or below what a hired manager would cost.
- Personal expenses paid by the business.
- Genuinely one-off costs, such as a lawsuit settlement, a relocation or a system replacement.
- Rent paid to an owner above or below market.
Each add-back needs evidence behind it: an invoice, a contract, a payroll record. A long list of undocumented add-backs is one of the fastest ways to lose a buyer’s trust. Our business valuation guide explains how normalized earnings turn into a price.
Step 4: Understand working capital before you sign
Most purchase agreements set a target level of working capital (broadly, receivables and other current assets minus payables and other current liabilities) that the business must deliver at closing. If the actual figure comes in below the target, the price usually goes down; above it, it may go up. Knowing your normal monthly working capital, and how seasonal it is, lets you negotiate a fair target instead of accepting the buyer’s number. A rolling forecast makes this much easier to show.
Step 5: Put the tax side in order
- File and pay everything on time: federal returns, payroll taxes, Texas sales tax and the Texas franchise tax report. Late filings and open notices become negotiating points for the buyer.
- Asset sale or stock sale. The structure changes how the price is taxed for both sides. In an asset sale where goodwill is involved, both the seller and the buyer file IRS Form 8594 to report how the price is allocated across the assets, so the allocation is worth agreeing in the purchase agreement.
- Texas successor liability. Texas law can make a buyer liable for a seller’s unpaid state taxes, up to the purchase price, unless the buyer withholds enough of the price or obtains a Certificate of No Tax Due from the Comptroller. Seller and buyer request it together on Form 86-114 before closing. Expect a buyer to insist on it.
Tax advice on deal structure depends on your circumstances, so involve your tax adviser before you agree terms, not after.
A simple timeline
| When | Focus |
|---|---|
| 24 to 12 months out | Catch up and clean the books, move to monthly closes, stop running personal costs through the business, consider accrual reporting |
| 12 to 6 months out | Build three years of consistent statements, document add-backs, reduce customer concentration where you can, tidy contracts |
| 6 to 3 months out | Prepare the data room, working capital history, a forecast and a tax-to-books reconciliation; get a valuation |
| Signing to closing | Answer due diligence questions quickly, agree the working capital target, request the Certificate of No Tax Due |
How Ledger Tree helps
Ledger Tree works mainly with established, privately held businesses in the $1 million to $20 million revenue range across Dallas–Fort Worth. We clean and maintain the books, build the statements and forecasts buyers expect, document normalized earnings, and support owners through the sale alongside our M&A advisory work. If a sale is on your horizon, even a few years out, see our services or call (214) 807-2440.
Thinking about selling in the next few years?
We will look at your books the way a buyer would, show you what would hold up and what would not, and set out a plan to get sale ready.
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Frequently Asked Questions
How far in advance should I prepare my financials to sell my business?
Ideally 12 to 24 months before going to market. That gives time to catch up and clean the books, run consistent monthly closes, separate personal expenses and build three years of statements a buyer can rely on.
What financial documents will a buyer ask for?
Usually three years of profit and loss statements, balance sheets and cash flow statements plus the current year to date, three years of business tax returns, monthly figures, revenue by customer and service line, receivables and payables aging, payroll records, debt and lease details, and key contracts.
What are add-backs when selling a business?
Add-backs are adjustments to reported profit for costs that will not continue under a new owner, such as owner pay above market, personal expenses paid by the business or genuinely one-off costs. Buyers accept them only when each one is documented.
What is a working capital target in a business sale?
It is the level of working capital, broadly current assets minus current liabilities, that the business must deliver at closing. If the actual amount is below the target the price usually goes down, and if it is above the target it may go up.
Who files IRS Form 8594 when a business is sold?
When a group of assets that makes up a trade or business is sold and goodwill or going concern value attaches, both the seller and the buyer file Form 8594 to report how the purchase price is allocated across the assets.
What is a Texas Certificate of No Tax Due?
It is a certificate from the Texas Comptroller showing that the seller has filed all returns and owes no state tax, penalty or interest. Without it, or a holdback of enough of the price, a buyer can be held liable for the seller’s unpaid state taxes up to the purchase price. Seller and buyer request it together on Form 86-114.
Sources: IRS, About Form 8594, Asset Acquisition Statement; Texas Comptroller of Public Accounts, Buying an Existing Business (Publication 98-117) and Form 86-114, Joint Request for Certificate of No Tax Due; Texas Tax Code §111.020. Preparation steps reflect Ledger Tree Financial Group practice. Published 2026-10-29.