Quick answer: To prepare for a business valuation, decide what question the valuation must answer, gather several years of financial statements plus the current year to date, build a supported schedule of adjustments, document your customers and the owner’s role, and list obligations that are not on the balance sheet. Clean, consistent records produce a stronger and faster valuation.
Key points
- Start with the purpose. A valuation to plan a sale, test an offer or price a partner buyout needs different emphasis than one for tax or litigation.
- Three to five years of statements and the current year to date are the usual base. Monthly detail is more useful than annual totals.
- Every adjustment to earnings needs a document behind it. Unsupported add-backs cost price and credibility.
- Buyers price what they can verify, so records on customers, contracts, people and obligations matter as much as the income statement.
Start with the question
Before gathering documents, write down what the valuation needs to answer. An owner thinking about selling in two years needs to know today’s price range and what would raise it. A partner negotiating a buyout needs a reference point both sides can accept. An owner who received an unsolicited offer needs a view of whether the offer is reasonable and what is missing from it.
The answer determines what to emphasize, and it settles a threshold question: whether you need a transactional valuation or an appraisal. The comparison of the two explains how to choose. If the result will go to a tax authority, a court or an auditor, the requirements are set by that audience, not by you.
Gather the financial records
The financial package is the foundation. Buyers and analysts work from the same documents, so assembling them early shortens everything that follows.
| What to gather | Why a buyer cares |
|---|---|
| Annual financial statements for the last three to five years | Shows the trend and the effect of any unusual year |
| Monthly statements for the current year and the prior year | Reveals seasonality and recent momentum |
| Federal tax returns for the same years | Provides an independent cross-check on reported income |
| General ledger detail for any account with adjustments | Lets an analyst trace add-backs to the source |
| Bank statements and loan schedules | Confirms cash and identifies debt |
| Accounts receivable and payable aging | Indicates collection risk and working capital needs |
| Inventory listing with aging, if applicable | Shows slow-moving stock that a buyer will discount |
| Fixed asset register and capital spending history | Distinguishes maintenance spending from growth spending |
If the statements are on a cash basis, tell the analyst. Most buyers want accrual-basis numbers, and converting can change reported earnings.
Build a supported schedule of adjustments
The single most valuable thing an owner can do is document the adjustments to earnings in advance. List each item you believe a buyer should add back or deduct, the amount for each period, why it is not part of normal operations, and the document that proves it: an invoice, a contract, a payroll record or a comparison of market pay for the owner’s role.
Be as willing to list deductions as add-backs. If the owner is paid below the cost of a replacement, or the business rents space from the owner at below-market rates, a buyer will adjust for it. The guide to EBITDA add-backs lists the categories and the tests buyers apply. A schedule that already reflects both directions signals that the owner has thought like a buyer.
Describe the owner’s role and the team
Buyers pay for a business that can run without the seller. They will ask what you do, which decisions only you make, who holds the key customer relationships, and who would run the company after you leave. Prepare an organization chart, a short description of what each senior person does and how long they have been with the company, and a candid note about your own role.
If you are involved in most sales, pricing, hiring and customer escalations, that is not disqualifying, but it affects price and structure. It is better for a valuation to reflect that reality than for a buyer to discover it later.
Document the customers and revenue
Revenue quality drives the multiple a buyer is willing to pay. Prepare a list of customers by revenue for each of the last several years, a view of how much comes from the largest accounts, the length of the relationship and the contract terms for each major customer, and an explanation for any customer who left or who is expected to. The guide to customer concentration explains how buyers read this information.
For service businesses, add the split between recurring and one-time work. For manufacturers, add product-line margins and any dependence on a single distributor or retailer.
List obligations that are not on the balance sheet
Anything that a buyer would treat as debt reduces what the owner receives. Prepare a list that includes loans and leases, owner loans, accrued bonuses and deferred compensation, taxes owed, customer deposits and prepaid revenue, pending legal matters, and equipment that needs replacing soon. The bridge from enterprise value to equity value explains why each matters.
Gather the operating and legal background
Short summaries are enough at this stage. Include the major contracts and leases, the licenses and permits the business needs, insurance coverage, any pending or recent disputes, intellectual property such as trademarks or patents, and any regulatory issues specific to the industry. Buyers will want these in diligence anyway, and a valuation is more reliable when the analyst has seen them first.
Decide what you want
A valuation is more useful when the owner has thought about outcomes. Consider the price you hope for and the minimum you would accept, whether you want to leave immediately or stay on for a transition, how much risk you are willing to take through an earnout or rollover equity, and the personal financial need the sale must meet. These answers shape how the analysis frames the results, and they are better made before the first offer arrives.
It also helps to speak with your CPA and attorney early. Taxes and legal structure change what a given price means to you, and your advisors may already hold some of the records you will need.
What happens during the engagement
An analyst typically begins with a data request, reviews the records and asks follow-up questions about the business and the adjustments. The analyst builds normalized earnings, assesses risks and strengths, considers pricing evidence and buyer types, and prepares a written analysis for discussion. The process goes faster when one person at the company is responsible for answering questions and when the first set of documents arrives complete.
Important: Things that slow a valuation
Statements that do not reconcile to tax returns, personal and business expenses that are mixed together, undocumented adjustments, and customer data that cannot be broken out by account are the most common delays. Each can be fixed, and fixing them before the engagement is cheaper than during it.
For more on how a valuation is built, read the overview of transactional valuation. For what buyers examine once a sale is underway, see the seller’s due diligence checklist and the guide to what drives the value of a business.
Frequently asked questions
How many years of financial statements do I need?
Plan on the last three to five fiscal years plus the current year to date. Buyers look for trends and for the effect of any unusual year, and longer history helps explain cycles. If the business is younger, provide everything since it started.
Do I need audited financial statements?
Not for a transactional valuation. Reviewed or compiled statements, or well-kept internal statements that reconcile to tax returns and bank accounts, can support the analysis. Buyers may later ask for a quality of earnings review, so statements that reconcile cleanly save time.
Should I tell my employees or customers I am getting a valuation?
A valuation is a private analysis and does not require telling anyone. Share it only with people who have a reason to know. Once you approach buyers, confidentiality agreements and a controlled process become important.
What if my books are messy?
Say so at the start. A good valuation can work from imperfect records, but the analyst will need more time to reconcile them and the conclusions will carry wider ranges. Cleaning up the most important issues first, such as personal expenses mixed into the business, improves the result.
Thinking about a sale or an acquisition?
The Impetus Group provides sell-side and buy-side M&A advisory, from preparation and buyer outreach to negotiation and closing. A transactional valuation is often the first step, scoped and priced separately.
Related guides
- Transactional Valuation: What It Is and How It Works: A transactional valuation estimates what a strategic or financial buyer would pay for a business. Learn what goes into one and how it differs from an appraisal.
- EBITDA Add-Backs: What Buyers Accept and What They Reject: Learn which EBITDA add-backs buyers accept in a sale, which they reject, and how adjusted EBITDA changes enterprise value, with a worked illustration.
- Quality of Earnings Report: What It Is and What Buyers Test: A quality of earnings report tests whether a company’s reported profit is real and repeatable. See what buyers examine, how it affects price and how sellers prepare.
- Due Diligence Checklist for Sellers: What Buyers Ask For and Why: A checklist of the documents and answers buyers request in diligence on a company sale, grouped by area, with the reason each request is made.
- What Drives the Value of a Business: The Factors Buyers Weigh: Buyers pay for future cash flow and discount it for risk. See the factors that raise or lower what a company is worth, from earnings quality to owner dependence.
- How an M&A Sale Process Works: Stages From Preparation to Closing: A step-by-step view of a sell-side M&A process: preparation, marketing, bids, the letter of intent, diligence, the purchase agreement and closing.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.