How to Prepare Your Financial Statements for the Sale Process

When a software or technology company enters the M&A arena, financial statements become more than just a record of past performance—they become a lens through which buyers assess risk, validate valuation, and forecast future returns. For founders and CEOs contemplating a sale, preparing your financials is not a back-office task—it’s a strategic imperative.

This article outlines how to prepare your financial statements for the sale process, what buyers expect, and how to avoid common pitfalls that can derail a deal or reduce your valuation.

Why Financial Statement Preparation Matters in M&A

Buyers—whether private equity firms, strategic acquirers, or family offices—rely heavily on financial statements to assess the health and scalability of your business. Clean, accurate, and GAAP-compliant financials are often a prerequisite for serious offers. In fact, as we noted in Completing Due Diligence Before the LOI, financial clarity can accelerate deal timelines and reduce the risk of post-LOI retrading.

Conversely, disorganized or inconsistent financials can raise red flags, trigger extended due diligence, or even lead to deal abandonment. Preparing your financials is not just about compliance—it’s about positioning your company as a credible, investable asset.

Key Steps to Prepare Your Financial Statements for Sale

1. Convert to Accrual Accounting (If You Haven’t Already)

Many early-stage companies operate on a cash basis for simplicity. However, most acquirers—especially institutional buyers—expect accrual-based financials. Accrual accounting provides a more accurate picture of revenue recognition, expenses, and profitability over time.

For SaaS companies, this is particularly important. Deferred revenue, prepaid contracts, and multi-year subscriptions must be properly accounted for. If you’re still on a cash basis, work with your controller or CPA to convert historical financials to accrual before going to market.

2. Ensure GAAP Compliance

Generally Accepted Accounting Principles (GAAP) provide a standardized framework that buyers trust. While audited GAAP financials are not always required, they are often expected for deals above $10M in enterprise value. At a minimum, your financials should be reviewed or compiled by a reputable CPA firm and follow GAAP conventions.

Key areas to review for GAAP compliance include:

• Revenue recognition policies (especially for SaaS or subscription models)
• Capitalization of software development costs
• Amortization and depreciation schedules
• Expense classification (e.g., COGS vs. operating expenses)

3. Reconcile and Normalize Your Financials

Buyers will want to understand your true operating performance. That means removing one-time, non-recurring, or owner-specific expenses from your income statement to calculate adjusted EBITDA or seller’s discretionary earnings (SDE).

Examples of adjustments include:

• Founder salaries above or below market
• Personal travel or non-business expenses
• One-time legal or consulting fees
• Non-operating income or losses

As discussed in Website Valuation and Discretionary Earnings, these adjustments are critical for valuation modeling and buyer confidence.

4. Prepare a Quality of Earnings (QoE) Report

For deals above $5M–$10M, buyers often commission a third-party Quality of Earnings (QoE) report. However, proactive sellers can benefit from preparing a sell-side QoE in advance. This report validates your revenue streams, expense structure, and EBITDA adjustments, reducing surprises during due diligence.

Firms like iMerge often coordinate with accounting partners to prepare QoE reports that align with buyer expectations and streamline the diligence process.

5. Segment Revenue and Costs by Business Line

Buyers want to understand what’s driving your growth. Segmenting your financials by product line, customer cohort, or geography can help demonstrate where value is being created—and where risks may lie.

For example, a SaaS company with 80% of revenue from a single enterprise client may face concentration risk. Breaking out revenue by customer or contract type can help buyers assess sustainability and scalability.

6. Build a Robust Financial Data Room

Once your financials are clean and normalized, organize them in a secure data room. Include:

• Three years of income statements, balance sheets, and cash flow statements
• Trailing twelve-month (TTM) financials
• Monthly financials for the past 12–24 months
• Revenue by customer, product, and geography
• Deferred revenue schedules (for SaaS)
• Cap table and equity grants

As we outlined in Top 10 Items to Prepare When Selling Your Website, a well-organized data room signals professionalism and reduces friction during diligence.

Common Financial Pitfalls That Derail Deals

Even strong companies can stumble during the sale process if their financials raise concerns. Watch out for these common issues:

• Inconsistent revenue recognition: Especially in SaaS, improper treatment of deferred revenue can distort profitability.
• Unreconciled bank accounts or AR/AP balances: These suggest weak internal controls.
• Missing documentation: Lack of backup for key contracts, invoices, or expense allocations can delay or kill deals.
• Overstated add-backs: Buyers will scrutinize EBITDA adjustments. Unsupported or aggressive add-backs can erode trust.

Should You Get Audited Financials?

While not always required, audited financials can increase buyer confidence—especially for deals involving institutional capital. If your company is approaching $10M+ in revenue or targeting a strategic buyer, consider commissioning an audit 12–18 months before going to market.

Alternatively, a reviewed financial statement (less rigorous than an audit but more credible than internal books) may suffice for mid-market transactions.

Final Thoughts

Preparing your financial statements for a sale is not just about cleaning up the books—it’s about telling a compelling, credible story of your company’s performance and potential. The more transparent and organized your financials, the more leverage you’ll have in negotiations.

Firms like iMerge specialize in helping software and technology companies navigate this process—from financial preparation to valuation modeling and deal execution. Whether you’re 12 months from a sale or fielding inbound interest now, getting your financial house in order is the first step toward a successful exit.

Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.