If you’ve ever sold a house before, you’ve probably come across phrases like “curb appeal” and good “staging.” Relatively small fixes like a new paint job, window shutters, and smoke alarms can run you a couple hundred bucks but boost the perception of your house by thousands of dollars. Rather than putting up a “For Sale” sign the instant you decide to move, you should put in some time into getting your house into the best shape possible. The same reasoning applies to selling your business. When you’re a first-time seller, most of what happens in the diligence process will feel new to you. People on both the buy-side and sell-side will come poking and prodding around your business with all sorts of questions and objections. One of the best things you can do is get a good sell-side QoE to better understand what you’re working with. If you start it early enough, it functions as a sort of pre-inspection, one that allows you to make improvements to your business before you sell. If you get the QoE a little closer to the actual transaction (within six months or so), then it will bring transparency to the deal and help you navigate conversations as the buyer tries to push down the price. Either way, in my biased (yet professional) opinion, it’s a good idea. Before we get into things, I’m going to warn you that this is some boring and dry advice. If you’re looking for a series of life-changing mantras and a recommendation for you to buy a cold plunge, you’ve got the wrong newsletter. Clean Up Your Books First things first. Get your books cleaned up. In practice, that means three things: get all personal expenses out of the business, make sure everything is reconciled, and categorize your transactions consistently. With the categorization of transactions specifically, you need to be consistent month to month. It’s not uncommon to see people putting transactions in different accounts depending on who did the bookkeeping that quarter. This noise shows up as variance during the diligence process. Next, the buyer’s team will run a variance analysis and see swings that don’t map to anything real in the business and is just evidence of classifying expenses incorrectly. Those swings will get flagged, and suddenly, you’re spending time explaining bookkeeping inconsistencies rather than talking about opportunities with the buyer. To go back to the house analogy, it’d be like painting all the rooms in your house different colors and then asking the buyer to imagine them as the same one. Document Every Add-Back Whether it’s owner compensation, personal expenses, one-time fees, transaction fees, or marketing expenses that go nowhere (just kidding, marketing is not usually an add-back) all of these add-backs need to be properly documented and categorized. Every add-back needs a paper trail and a good memo explaining what it is and why it’s being added back. An add-back with no support looks like an attempt to inflate earnings, even when it’s completely legitimate. On the other hand, an add-back with a clear memo, a date, and a reason looks a normal adjustment. Here’s my pro tip: if you add back something ending in “000,” a buyer and their QoE provider will scrutinize that number more. Make Sure Reconciliations Tie Out Third, the reconciliations need to tie out. In this case, reconciliations means the book-to-tax analysis, the proof of cash, and the payroll reconciliation. Let’s run through some examples for each. If your tax returns show lower income than the P&L, the buyer might run into some issues if they’re using SBA financing, because lenders tend to lean heavily on tax returns to underwrite and size the loan. If the proof of cash doesn’t tie out, it tells the buyer’s team the books aren’t complete. It goes without saying that incomplete books cast doubt on everything else in the file. And, if your books show higher payroll expense than what’s on the actual payroll reports, the W-2s or the 940, you’ve got yourself a mismatch that isn’t going to look good to anyone reviewing it. All of these analysis gaps do more than just raise questions and extend the negotiation process. They can actually cap what the buyer is able to borrow, making it even more difficult for the deal to go through. Normalize Working Capital Net working capital is typically calculated as current assets minus current liabilities, with cash and debt-like items removed. On smaller deals, the exact definition can flex depending on what the seller and buyer negotiate, but that’s the general framework. It’s important to remember that the EBITDA multiple already implies a normalized amount of working capital baked into the price. If the working capital target isn’t clearly defined and supported going in, it becomes a post-closing argument instead of a pre-closing agreement. Be prepared that, in most circumstances, you are not going to be able to sell your company plus sell your inventory. Your inventory is typically purchased as part of the business. There are some cases where selling both does happen, but it is definitely not the norm. Why This Matters Sell-side QoEs are for closers. They help first-time sellers sell at the right price and avoid potential issues before they surface in the diligence process. By eliminating these surprises, you can move your deal along more efficiently and smoothly. You’re also less likely to see things fall apart. If you’re considering selling your business and want to learn more about what a QoE can do for you, set up some time to talk with me.