Cleaning Up the Balance Sheet & Unwinding Owner Perks

When you’re preparing to sell your business, your financial statements tell the story buyers will rely on to decide how much it’s worth. If that story is cluttered with personal expenses, discretionary spending, or outdated debts, the picture becomes murky, and buyers will assume the worst.

Cleaning up the balance sheet and unwinding owner perks are among the most impactful steps  you can take before going to market. It sharpens the company’s financial presentation, clarifies earnings power, and can directly increase the valuation multiple buyers are willing to pay.

This process is about showing your business’s true profitability and long-term potential.

Why Presentation Matters

Buyers review the balance sheet and income statement to assess risk and return. A messy set of books suggests weak controls, undisclosed liabilities, or unreliable cash flow. That uncertainty forces buyers to discount their offers, request larger escrows, or pile on contingencies.

Conversely, a clean, organized balance sheet signals professionalism and transparency. It shows that the company is well-managed, financially disciplined, and ready for a seamless transition.

The goal is to present your financials in a way that accurately reflects the company’s health. Do not use short-term accounting tricks to inflate values, and avoid including personal spending or outdated obligations that won’t continue after a sale.

Step 1: Identify and Remove Non-Business Expenses

Many privately held companies legitimately mix personal and business spending. It’s common for owners to run family vehicles, travel, or insurance through the company. While these expenses may have made sense for tax efficiency during ownership, they distort earnings at the time of a sale.

Go through your income statement line by line and identify:

• Personal travel or entertainment
• Vehicles or equipment used primarily for personal reasons
• Family member salaries or benefits
• Club memberships, charitable donations, or sponsorships not related to business operations
• Home office reimbursements beyond everyday business use

These items should be reclassified or removed. Buyers will adjust EBITDA (earnings before interest, taxes, depreciation, and amortization) upward once they see documentation that these are nonrecurring owner benefits, provided the data are clearly presented and verifiable.

Step 2: Understand “Add-Backs” and How They Work

An add-back is an adjustment to EBITDA that removes discretionary, one-time, or non- operational expenses. Properly documented add-backs can substantially increase the company’s valuation, because buyers apply their offer multiple to the adjusted EBITDA figure.

Common Add-Back Examples

• Owner’s salary or bonuses above market rate
• Personal vehicle, insurance, or travel costs
• Nonrecurring legal or consulting fees
• One-time marketing campaigns or relocation expenses
• COVID-related disruptions or government assistance write-offs
• Excess rent paid to related parties

For instance, if your company shows $1.2 million in EBITDA and you identify $150,000 in legitimate add-backs, your adjusted EBITDA becomes $1.35 million. At a 5x multiple, that’s a $750,000 increase in valuation.

The key is credibility. Every add-back should be clearly documented with invoices, payroll data, or other evidence. Overreaching or using aggressive assumptions can backfire when the buyer’s accountants re-audit the numbers.

Step 3: Pay Off or Restructure Nonessential Debt

Excess or poorly structured debt weighs down the balance sheet and raises questions about cash flow. Before marketing the business, review all liabilities and consider:

• Paying off high-interest or short-term loans that won’t carry over to the buyer
• Consolidating or refinancing long-term notes at more favorable terms to improve debt-service coverage ratios
• Eliminating shareholder loans or clearly documenting them so buyers can distinguish between operating debt and owner financing

Reducing debt improves key ratios, such as the current ratio and debt-to-equity, making the company appear stronger and less risky. If repayment isn’t feasible, be prepared to explain why the debt exists and how it supports future growth.

Step 4: Reconcile Assets and Liabilities

A cluttered balance sheet can hide inefficiencies and obscure the true value of assets. Cleaning it up ensures accuracy and builds trust. To reconcile your balance sheet, you should:

• Write off obsolete inventory or machinery no longer in use.
• Collect old accounts receivable or record reserves for doubtful accounts.
• Dispose of idle or non-core assets that aren’t part of ongoing operations.
• Verify accrued liabilities and ensure they are current and properly categorized.

The result is a lean, accurate statement that reflects only the assets and obligations relevant to ongoing business operations.

Step 5: Separate Owner-Related Transactions

Owner loans, advances, and distributions can be confusing to buyers. They want to understand how much cash truly remains in the business and how much flows to the owner personally.

Clarify these items by:

• Reclassifying owner draws and shareholder distributions correctly.
  
  
• Settling outstanding related-party receivables or payables.
• Documenting any personal guarantees or collateralized obligations and removing them before the sale.

The cleaner your capital accounts and related-party transactions, the fewer questions will arise during buyer due diligence.

Step 6: Normalize Working Capital

Working capital (defined as current assets minus current liabilities) is a common negotiation point in M&A. Buyers expect a “normal” level of working capital at closing, and deviations can lead to price adjustments.

Analyze your cash, receivables, payables, and inventory cycles over the past 12 to 24 months. Identify trends, seasonal swings, and any anomalies. If your working capital is unusually high or low, prepare explanations and supporting data.

Early normalization helps prevent post-closing disputes and shows buyers that cash management is predictable.

Step 7: Create a Clear, Credible Financial Narrative

Numbers alone don’t tell the whole story. Buyers want context. Prepare a financial narrative, a concise explanation of trends, adjustments, and management decisions, to accompany your financial statements.

Your narrative should include a summary of revenue growth and significant cost drivers; explanations for unusual year-over-year fluctuations; a documented list of all add-backs; and a description of recent investments or strategic changes that position the company for growth.

A well-organized presentation not only improves transparency but also differentiates your business from competitors. It communicates that you know your numbers and have nothing to hide.

Step 8: Work with Advisors to Validate Adjustments

Even well-intentioned owners can miss important nuances in accounting standards. Before presenting financials to potential buyers, have your CPA perform a quality of earnings (QoE) review.

A QoE report verifies that your earnings are sustainable and your add-backs legitimate. It provides third-party validation that reassures buyers, particularly private equity groups that rely heavily on such analyses.

If any inconsistencies emerge, you’ll have the chance to correct them privately rather than during buyer due diligence, when time pressure and skepticism can erode deal value.

Step 9: Forecast the Future, Not Just the Past

A clean balance sheet sets the stage for compelling projections. Buyers pay more for businesses that can demonstrate predictable future earnings. Once your financials are organized, prepare pro forma forecasts for revenue, margins, and cash flow.

Link those projections to the historical data you’ve just refined. This combination of accurate history and credible forecasting enhances valuation and builds confidence in management’s ability to deliver results.

The Impact on Valuation

EBITDA serves as the baseline for most business valuations. Every unnecessary expense you remove or legitimate add-back you substantiate increases that figure, and, by extension, the sale price.

Just as significantly, a tidy balance sheet reduces perceived risk. Buyers are more willing to apply higher multiples to companies that demonstrate transparency, stability, and disciplined financial management.

Example:

Company A reports $2 million in EBITDA with $200,000 in personal expenses and one-time costs.
After cleaning up the books, the adjusted EBITDA rises to $2.2 million.
At a 6x multiple, the company’s value increases from $12 million to $13.2 million - a $1.2 million gain created simply through preparation.

The Payoff of Financial Discipline

Cleaning up the balance sheet and unwinding owner perks isn’t glamorous, but it’s one of the most direct ways to increase sale value and buyer confidence. It transforms your financial statements from a tax-minimizing tool into a sale-maximizing asset.

By taking these steps well in advance, you’ll enter negotiations with precise, defensible numbers that buyers can trust. The more accurately your financials reflect the company’s real earning power, the more likely you are to achieve a smooth closing and a premium price.