How can you prepare financial statements for a private equity sale?

1 Audit your books

The first step is to audit your books and make sure they are accurate, complete, and consistent. You should hire an independent auditor or accounting firm to review your financial statements and issue an opinion on their reliability and compliance with the relevant accounting standards. An audit will also help you identify and correct any errors, discrepancies, or irregularities that might raise questions or concerns from the buyers.

2 Adjust for EBITDA

The second step is to adjust your earnings before interest, taxes, depreciation, and amortization (EBITDA) to reflect the true profitability and cash flow of your business. EBITDA is a popular metric used by private equity buyers to value and compare businesses, but it can be distorted by various non-recurring, non-operating, or non-cash items that affect your income statement. Therefore, you should make adjustments for these items to show the normalized or adjusted EBITDA of your business. Such adjustments may include adding back one-time expenses or losses, such as legal fees or restructuring costs, subtracting non-recurring or extraordinary income or gains like asset sales or insurance proceeds, adding back owner's compensation or perks that are above the market rate or not essential for the business operation, subtracting expenses or income that are related to discontinued or non-core operations or assets, and adding back depreciation and amortization expenses as they are non-cash charges that reduce your net income but not your cash flow.

4 Review your balance sheet and cash flow statement

When reviewing your balance sheet and cash flow statement, you should ensure that they accurately reflect the current and expected financial position and liquidity of your business. Additionally, you should be prepared to explain any significant changes or items on your balance sheet and cash flow statement to the buyers. This includes examining your working capital and net debt levels and how they affect your cash flow and valuation, as well as taking a closer look at inventory, accounts receivable, and accounts payable balances. You should also review fixed assets, intangible assets, and goodwill, and how they are valued and depreciated or amortized. Additionally, you should consider any contingent liabilities (such as leases, pensions, warranties, or lawsuits) and how they are accounted for and disclosed; plus capital expenditures, dividends, or distributions and how they are funded and planned.

5 Update your financial statements regularly

The fifth step is to update your financial statements regularly throughout the sale process and provide the latest information to the buyers. You should also be ready to respond to any questions, requests, or due diligence inquiries from the buyers. Doing so will help you maintain credibility and transparency of financial performance and projections, address any issues or concerns that might arise from buyers or advisors, and negotiate the best possible valuation and deal terms for your business.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?