- 1Get on accrual basis if you're not already. Buyers will adjust to accrual anyway. Cleaner if you do it first.
- 2Reconcile and clean three years of financials. Buyers want trends, not just snapshots.
- 3Identify and document one-time / non-recurring items. These are added back to EBITDA in negotiations. Owner salary above market, lawsuit settlements, M&A fees, etc.
- 4Build a quality of earnings package. Supporting documentation for every revenue and expense line that's material.
- 5Customer concentration analysis. Top 10 customers as % of revenue, churn, contract terms.
- 6Vendor and contract inventory. Change-of-control clauses, key vendor dependencies, IP ownership.
- 7Working capital normalization. Establish a baseline working capital figure. This becomes part of the purchase price calculation.
- 8Set up the data room. Financial documents, contracts, IP, employment, corporate, tax. Buyers expect this on day one.
Start 12-18 months before
Most acquisition-readiness work takes longer than you expect. Clean books for the full trailing 24 months, documented accounting policies, complete equity records, reconciled intercompany activity, supporting documentation for all major transactions. Starting 12-18 months out gives time to do this properly.
If your timeline is shorter, say, an unsolicited inquiry has arrived, the work compresses into a frantic 3-month sprint. Possible but much harder and more expensive. Cleanup that would cost $20K over 12 months might cost $60K during an active deal process.
The specific early work: reconcile all accounts through the most recent closed period, update any lagging documentation, complete any overdue tax filings, finalize any pending legal matters. Get to a clean baseline before any serious acquisition conversation begins.
The quality-of-earnings foundation
Buyers conduct quality-of-earnings (Q of E) analyses during diligence. This is a detailed review of revenue quality, expense normalcy, and adjusted EBITDA. It is the single most scrutinized financial area in acquisition diligence. Prepare for it proactively.
Many sellers commission their own Q of E before going to market. This sell-side Q of E identifies issues before the buyer does, lets you fix them or frame them, and provides a credible baseline for negotiations. Typical cost: $30K-$75K depending on company size.
The Q of E analysis identifies "real" EBITDA after removing one-time items, owner compensation adjustments, and accounting normalizations. The number often differs from reported EBITDA by 10-30%. Going into a sale with a clear Q of E-adjusted number is much stronger than debating it with buyers.
Working capital and net debt
Acquisition pricing almost always uses a cash-free, debt-free basis with a working capital peg. This means the headline price is adjusted at close for actual cash, debt, and working capital levels. Getting these calculations right matters for the net proceeds you receive.
Document normal working capital levels. Typical AR, AP, inventory, accrued expenses for a representative period. The working capital peg at close will reference these levels. Without historical data, the peg negotiation gets muddled.
Identify any debt-like items that could be classified as debt by buyers. Deferred compensation, customer deposits, warranty reserves, pending litigation. These may or may not be treated as debt in the transaction, but the negotiation is easier if they are surfaced early.
The people and information readiness
Designate a deal team internally. The CEO and CFO are usually the primary participants, with legal counsel and investment banker. Everyone else operates normally during the process. Widening the circle creates leak risk and operational distraction.
Keep operating the business during the process. Missing your numbers during diligence is the fastest way to lose valuation. Buyers adjust their offers based on what they see. A strong Q3 during diligence supports your valuation; a weak Q3 undermines it.
Plan for a long process. From first investor conversation to cash in the bank typically runs 6-12 months. Some deals close faster. Some take 18 months. Having a clear close timeline helps you manage cash, team communications, and business decisions during the process.