What a buyer will look for in your accounts, line by line

Aug 29
3 min read

Updated: 2 days ago

Introduction

An owner presents three years of accounts showing healthy profits. The buyer's adviser works through them and produces a revised figure substantially lower, having removed items that will not continue, added costs the business has not been paying, and questioned several things that cannot be substantiated.

The owner feels the business is being undervalued. The buyer is doing something entirely ordinary: establishing what profit a new owner would actually receive. Understanding that exercise in advance is what allows an owner to present figures that survive it. Being surprised by the adjustments is what weakens a seller's position.

1. What a buyer will look for in your accounts is sustainable profit

The single organising question.

Not what the business made, but what it will continue to make under new ownership. Every adjustment they make is an attempt to answer that, and framing your own figures the same way removes most of the argument.

2. Expect owner costs to be normalised

The most common adjustment.

If the owner works full time and takes little salary, a market-rate cost for that role is added. If the owner takes far more than the role warrants, the excess is added back. Either way the figure moves. Owners who pay themselves nothing are frequently disappointed by this adjustment.

3. Expect personal expenses to be removed

Both ways.

Vehicles, travel, subscriptions and anything personal running through the business is stripped out. Where those benefits were genuine to the owner, the profit rises; where they are simply disallowed, questions arise about the reliability of everything else.

4. Expect one-off items to be adjusted

In both directions.

An exceptional contract, a legal settlement, a grant, or an unusual cost. Buyers want the recurring picture, and anything that will not repeat is removed from it whichever way it points.

5. Expect customer concentration to be examined closely

A specific risk to be priced.

Revenue by customer for each of the last three years. Where one or two dominate, the buyer assesses whether those relationships survive a change of ownership, and prices the risk accordingly.

6. Expect the working capital position to be scrutinised

Frequently a surprise to sellers.

Debtors, creditors, stock and how much cash the business needs to operate. Buyers negotiate on the working capital delivered with the business, and this is a substantial part of many transactions.

7. Expect anything undocumented to be discounted

The general rule of diligence.

Verbal contracts, informal arrangements, cash income and undocumented processes. What cannot be verified is either excluded from the valuation or covered by a warranty you will be asked to give personally.

8. Expect the trend to matter more than the level

Direction over absolute figures.

Three years of growth supports a higher multiple than three years of decline at the same average. Buyers are purchasing the future, and the trajectory is the strongest evidence available about it.

9. Expect every figure to be traced back

To source documents.

Bank statements, invoices, contracts and payroll records. Accounts that cannot be reconciled to underlying records slow the process, reduce confidence and frequently reduce the price. Every unanswered question becomes either a discount or a warranty you give personally.

Prepare your own adjusted figures before going to market, with the reasoning written down. Presenting a normalised profit figure you can defend is far stronger than presenting statutory accounts and allowing the buyer's adviser to make every adjustment unopposed.

Conclusion

Understand that the buyer is establishing what profit continues without you.

Expect owner remuneration to be normalised to a market rate, personal expenses to be stripped out, one-off items to be adjusted in both directions, customer concentration to be examined and priced, working capital requirements to be scrutinised, undocumented arrangements to be discounted or warranted, the trend to carry more weight than the absolute figure, and every number to be traced to source records — then prepare your own defensible adjusted figures before going to market.