Exit Strategy: Getting Your Financials Ready to Sell

Why Financials Make or Break a Sale

When someone buys a business, they are buying future cash flows. Your financial records are the evidence that those cash flows exist, are sustainable, and are likely to continue under new ownership.

Buyers and their advisors will scrutinise your financials with more intensity than you might expect. Clean, well-organised, transparent financial records increase buyer confidence, reduce due diligence friction, and ultimately drive a higher valuation.

Messy, incomplete, or questionable financials do the opposite. They raise red flags, erode trust, and either kill deals or reduce the purchase price.

What Buyers Look For

Revenue Quality

Recurring revenue is valued more highly than one-off revenue. A business with $500,000 in recurring contracts is worth more than one with $500,000 in ad-hoc project work, because recurring revenue is more predictable.

Buyers also look at:

• Revenue concentration (is too much revenue dependent on one or two clients?)
• Revenue growth trend (is it increasing, stable, or declining?)
• Revenue mix (how much comes from each product or service line?)

Profitability

Normalised profit is the metric buyers focus on. This means your actual profit adjusted for:

• Owner's salary (normalised to a market-rate salary)
• One-off expenses that will not recur under new ownership
• Personal expenses run through the business
• Non-arm's length transactions (below-market rent paid to a related party, for example)

The normalised profit (often called EBITDA - earnings before interest, tax, depreciation, and amortisation) is typically what the valuation multiple is applied to.

Cash Flow

Positive, consistent operating cash flow demonstrates that the business generates real cash, not just accounting profit. Buyers want to see that the profit on paper translates to actual cash in the bank.

Clean Books

This is where many business owners fall down. Buyers want:

• Financial statements prepared in accordance with accounting standards
• Clean, well-structured chart of accounts
• Proper categorisation of all transactions
• Reconciled bank accounts with no unexplained discrepancies
• Accurate accounts receivable and payable records
• Up-to-date tax lodgements (BAS, income tax, super)

Preparing Your Financials

Step 1: Clean Up Your Books

Start at least 12 to 24 months before you plan to sell:

Remove personal expenses - Any personal expenses running through the business need to be identified and removed or reclassified. This is the most common cleanup task.

Correct miscategorised transactions - Review your chart of accounts and ensure every transaction is in the right place. Tools like SortBooks help maintain accurate categorisation going forward.

Reconcile everything - Bank accounts, credit cards, loans, accounts receivable, accounts payable - everything should be reconciled and balanced.

Resolve outstanding issues - Clear any ATO debts, address outstanding disputes, and settle any unresolved financial matters.

Step 2: Normalise Your Profit

Work with your accountant to prepare a normalised profit statement:

• Add back the owner's above-market salary or personal benefits
• Remove one-off expenses (legal settlement, equipment write-off, COVID-related costs)
• Adjust for below-market rent or related-party transactions
• Show the normalised EBITDA that a buyer would expect under new ownership

Step 3: Prepare Quality Financial Statements

Have your accountant prepare:

• Three years of profit and loss statements (monthly)
• Three years of balance sheets (annual minimum, quarterly preferred)
• Cash flow statements for at least the last two years
• A normalised EBITDA reconciliation
• Tax return copies for the last three years

Step 4: Document Revenue Visibility

Prepare a schedule showing:

• Recurring revenue by client (with contract terms and renewal dates)
• Revenue by product or service line
• Customer concentration (percentage of revenue from top 5 and top 10 clients)
• Revenue growth trend (monthly for the last 24 months)

Step 5: Organise Supporting Documentation

Buyers (and their lawyers) will want:

• Copies of all client contracts
• Lease agreements
• Employee contracts and award compliance documentation
• Insurance policies
• Equipment and asset registers
• Intellectual property documentation
• Supplier agreements

Valuation Basics

Small business valuations typically use a multiple of normalised EBITDA:

• 1-3x EBITDA: Small businesses with owner-dependent operations
• 3-5x EBITDA: Established businesses with systems, team, and recurring revenue
• 5-8x EBITDA: Well-established businesses with strong growth, IP, or market position

The multiple depends on:

• Industry
• Business size and growth
• Customer concentration
• Revenue quality (recurring vs one-off)
• Owner dependence (can it run without you?)
• Quality of financial records

How to Increase Your Multiple

Reduce owner dependence - If the business cannot function without you, the multiple drops. Build a team and systems that operate independently.

Increase recurring revenue - Convert one-off clients to contracts. Build subscription or retainer models.

Diversify your client base - No single client should represent more than 15-20% of revenue.

Document your processes - A business with documented processes is easier to transfer and therefore worth more.

Clean your financials - Transparent, well-organised books reduce buyer risk and support a higher multiple.

Tax Implications of Selling

Selling a business has significant tax consequences:

• Capital gains tax (CGT) applies to the sale of business assets or shares
• Small business CGT concessions can significantly reduce or eliminate CGT for eligible businesses (turnover under $2 million or net assets under $6 million)
• The 50% CGT discount applies if you have held the asset for more than 12 months
• Retirement exemption allows up to $500,000 in CGT-free gains if directed to super

These concessions can save hundreds of thousands of dollars. Plan your exit with a tax advisor who specialises in business sales.

The Timeline

Getting exit-ready is not a last-minute exercise:

24 months before: Start cleaning up books, removing personal expenses, and improving financial reporting.

18 months before: Normalise your profit, reduce owner dependence, and strengthen recurring revenue.

12 months before: Prepare formal financial statements, engage a business broker or M&A advisor, and get a preliminary valuation.

6 months before: Start marketing the business, prepare the information memorandum, and engage with potential buyers.

Sale process: Due diligence, negotiation, and settlement (typically 3-6 months).

The better your preparation, the smoother the process and the higher the price. Your financial records are the foundation of everything. Keep them clean, accurate, and current - your future self (and your future buyer) will thank you.