A liquidity event, or a sale of one’s business, can be the largest monetary event in a person’s lifetime, thus adequate preparation is key to ensuring a smooth, and successful outcome. Those who have been through a sale process may understand what’s involved, yet for those first-time entrepreneurs, an indescribable exercise awaits, which if unprepared, can lead to a whole host of terrible outcomes. Most commonly managers end up drowning in due diligence requests, where they lose focus on the business, growth slows down, and projections are missed. This usually will blow up the deal, either by the buyer lowering the price or by walking away completely if performance is materially lower than initially projected. Of course, this isn’t the outcome you want, so the key is how can one mitigate such outcomes and ensure the highest probability of a successful transaction.

Best practices of preparing and planning well in advance makes life MUCH easier when engaging in a sale or capital raise, smoothing out the process for all parties involved, reducing management’s time requirements, allowing for more focus on the business, and ultimately increasing the probability of a positive outcome on all fronts. Below are the key areas to focus on preparation-wise, which not only help with a future transaction, but can also be useful for owners and managers from a business intelligence and analytics perspective in better understanding their business.


  • Make sure your books are in full GAAP accrual, going back at least 2 full years, if not 3
  • Hire a third-party accounting firm to convert your books to GAAP accrual trailing 2-3 years, and going forward. This is a black and white concept, so if your books are currently partial GAAP/accrual, this isn’t sufficient
  • This may cost $20-30k as a 1-time project, and take a few months, but is well worth it and must happen prior to a transaction closing
  • As part of the accounting clean up, make sure your entries (chart of accounts) in the accounting system are all properly organized/categorized for all three financial statements (P&L, BS, SCF). For instance, all 1-time vs recurring revenue are in separate buckets, corresponding COGS, expenses, capex is capitalized and placed on BS/SCF vs. IS., etc.…
  • Be able to readily produce monthly, quarterly and annual statements, directly from the accounting software. Investors/buyers want to see monthly financials for 24, 36 and in some cases 60 months, and track trends across lines of revenue, margins on revenue lines, expenses, etc…
    • this specific request is a monthly P&L for the last 36 months on one tab in Excel
    • this shouldn’t be a request which takes an accounting department or professional a week to produce. It’s literally a dropdown items that takes 30 seconds
  • Key here is consistency of GAAP accrual accounting, with proper segmentation of revenue line items by service/product line, corresponding COGs, showing true gross margin by product/service, as well as accurate categorization of expenses
  • Further, ensure revenue and expenses are in the proper month where they’re supposed to be, NOT when they were collected or paid. Also, pre-paid expenses or revenue are properly deferred and amortized. Again, GAAP and accrual
  • If you are unclear whether you are GAAP compliant, have a call with an accounting firm and discuss your practices. If you’re still unclear get a second opinion


  • This references any/all data which describes your business outside of accounting. Below are reports that most sophisticated investors/acquirers will want to see on a trailing basis initially, when analyzing your business for investment or acquisition:
    • Revenue by type for last three years. Break out product vs. service. For service breakout 1-time vs. recurring
    • Margin by type corresponding to all entries above
    • Unit economics – for each unit of product or service, what’s the corresponding COGS to deliver such product or service?
    • Churn – customers gained/lost by number and revenue by month trailing for the last three years
    • Revenue by customer for the top 20 for the last three years; Include contract start/end dates. Names can be coded
    • Bookings by month for the last three years – breakout new vs. existing customer growth, and recurring vs. 1-time revenue
    • Other KPIs which management uses to run the business
  • Above is pre-term sheet diligence. Below are items which will be requested post term sheet where you’re in confirmatory due diligence. This is a small subset, as the business and legal due diligence lists can span 10-20 pages each!
    • Customer contracts for the top ten customers
    • Contracts for all vendors
    • AR/AP aging for last three years
    • Corporate formation documents – articles of incorporation, board minutes, operating agreements, corporate structure (parents, subs) etc.…
    • Any/all acquisitions or investment documentation
    • Capitalization table
    • List of employees by function, comp, date started. Same list for each of past three years
    • Organization chart
    • All marketing materials used for client pitches
    • Graphic of systems and workflow used internally
    • List of all past/current legal matters or litigation
    • Monthly bank statements for the past 24 months
    • Audited and reviewed  compiled financials for past 3 years
    • Tax returns for the past 3 years
    • Documentation of all owned or pending IP
    • Costs per acquisition for new customers. Average useful life of a customer
    • Price lists
  • As you can see it gets quite intensive, and this is just a subset. During diligence, it’s very common that the buyer/investor will hire an accounting firm to perform what’s called a Quality of Earnings (QOE) which the company pays for and costs between $25-50k. This is basically a summarized due diligence package of all aspects of the business. It encompasses many of the items above, yet it’s much more in depth. The more prepared you are, the more painless that specific request is


  • Maintain accurate and proper organization of files, within categorized folders. For instance, folders should include: Financials, HR, Contracts, Legal, Corporate, Operations, etc…
  • Once this is created and actively used, it becomes seamless to begin sharing significant amounts of data


  • Going at this alone from a managers/owner’s perspective is doable, yet not advisable. These deals are not in your control and can die at any time. You can literally be working on a deal for 6 months, be a week away from closing, and it can die right before for a multitude of reasons outside of your control
  • Therefore, mitigate your exposure with support around you. This includes a CFO or controller, as well as an investment banker, and proper legal resource
  • The Controller/CFO supports you internally from a financial/accounting/reporting perspective, while the banker architects and manages the entire process, especially leading all deal related discussions as much as possible. This allows management to focus more on ongoing operations and sustaining the growth of the business during this process


  • As mentioned above, its never too early to start getting your accounting correct, financial /operational reporting in order, and proper organization of company information
  • The further in advance you begin, the smoother the implementation of such practices, vs. a mad rush when a deal is starring you in the face, creating an avalanche of work, causing a tremendous distraction away from the core business
  • For those currently evaluating a transaction where they acknowledge their lack of preparedness, it’s highly advisable to momentarily take a step back from your discussions with the buyer/investor, until you have an investment banker at least review your financials, and provide feedback on the state of your financials, how they should be presented, and most importantly on the valuation you’re receiving, vs. what’s in the market
  • Accuracy of your financials as well as how they’re presented can mean the difference of 20-30% of value. A savvy banker knows exactly how financials should be presented, with the most important drivers highlighted, naturally increasing the valuation
  • This is in addition to the banker of course knowing what multiples are standard, especially those focusing on your respective space, based on their transaction experience, comparables in the space, and other proprietary information

Hopefully this provides a nice framework of steps to take and what to expect with any M&A or capital raise transaction, so you can adequately prepare in advance and ensure the highest likelihood of success.