How to Prepare Your Financials for a Valuation

Why Preparing Your Financials Matters

Before a business valuation, your financials need to be clean, complete, and well-documented. Sloppy records create delays, reduce credibility, and can lead to undervaluation of your business. Whether you're planning to sell, raise capital, or just understand your business’s worth, well-prepared financials lay the groundwork for an accurate and defensible valuation.

Step-by-Step: How to Prepare Your Financials for a Valuation

1. Clean Up Your Books

Start by ensuring your bookkeeping is up to date. That means:

• Reconciling all bank and credit card accounts

• Categorizing all income and expenses

• Removing duplicate or miscategorized entries

• Closing out any stale accounts receivable or payable balances

  
  

If you’re behind on this step, consider hiring a bookkeeping service. Development Theory’s bookkeeping team specializes in working with valuation clients.

2. Separate Business from Personal Expenses

One of the most common red flags in small business financials is the blurring of personal and business expenses. This can distort your EBITDA and hurt your valuation.

• Remove personal items from your P&L

• Identify discretionary expenses clearly for potential “add-backs”

• Maintain separate bank and credit card accounts for business

  
  

3. Gather Historical Financial Statements

Most valuations require at least 3 full years of financials (preferably 5 years), plus year-to-date numbers. You’ll need:

• Profit & Loss Statements (P&L)

• Balance Sheets

• Cash Flow Statements

• Tax Returns (business and personal, if pass-through entity)

  
  

Make sure they match across documents. For example, the income reported on your tax return should align with your P&L. If there are discrepancies, document why.

4. Prepare Key Supporting Documents

Supporting documentation helps valuation analysts verify your numbers. Collect:

• General ledger reports

• Payroll summaries

• Loan agreements and repayment schedules

• Owner compensation details

• Inventory lists

• Equipment or fixed asset depreciation schedules

  
  

For asset-heavy businesses, depreciation can significantly impact valuation. See IRS.gov for proper depreciation guidelines.

5. Document Any Add-Backs

Add-backs are adjustments that normalize earnings by removing non-recurring or discretionary expenses. These might include:

• Owner’s salary above market rate

• One-time legal or repair expenses

• Personal auto, travel, or phone expenses

  
  

Make sure each add-back is clearly documented with receipts, notes, or explanations.

6. Explain Anomalies or One-Time Events

If 2020 was a weird year for your business (i.e., COVID), that’s okay. Just document it.

Include a summary note with:

• What happened

• When it happened

• How it impacted your numbers

• Why it won’t happen again

  
  

This helps the valuator interpret your financials fairly.

Helpful Tools and Templates

Use these tools to stay organized:

• QuickBooks Online – to generate reports and maintain real-time records

• Google Drive or Dropbox – to share documents with your valuation expert

• Income & Expense Add-Back Template – Development Theory provides this during onboarding

• Cash Flow Tracker or Forecasting Tools – especially if future projections will be part of the valuation

  
  

Pro Tips from Experience

• Get a bookkeeper to review your financials first. They’ll catch issues faster than you can.

• Use accrual accounting if possible—most valuators prefer it over cash basis.

• Don’t delay cleanup. The longer it sits, the harder it gets to explain.

• Ask your valuation expert what they need upfront. Every project is slightly different.

  
  

Common Pitfalls to Avoid

Mistake: Mixing personal and business finances

Fix: Separate your accounts and document add-backs

Mistake: Using outdated or cash-basis numbers

Fix: Recast into accrual format for more accurate reporting

Mistake: Missing documents during valuation

Fix: Use a checklist to ensure everything is uploaded

Mistake: Fudging numbers to look better

Fix: Be honest—transparency builds trust and prevents legal risks

Final Checklist

Before sending your financials to a valuation professional, make sure you have:

• Up-to-date and reconciled bookkeeping

• Clean separation of business and personal expenses

• 3-5 years of financial statements + YTD reports

• Supporting documentation for all financial activity

• Clear list of add-backs with documentation

• Notes on any unusual years or one-time events

Ready for a Valuation?

If you need to get your financials in order first, check out Development Theory's Bookkeeping service. Clean books = higher value, better insights, and faster turnaround. Otherwise, Book a Discovery Call to get started!