A buyer doesn't skim your books. Describing the due diligence on the sale of a small software business, its founder recalled the buyer's analyst "examining every transaction for 12 months with a microscope" (patio11 on Hacker News). The analyst found a card chargeback that showed up in Stripe but not in the revenue books, and asked about it. The founder's verdict afterward was that having clean books had been a major help.
If you plan to sell in the next year or so, that's the standard to prepare for. This guide is a month-by-month plan for your books, built around what buyers and SBA lenders actually check, including the SBA lending rules that took effect October 1, 2026.
How to prepare your financials to sell a business: the short answer
Start about a year before you list. Separate personal spending, reconcile every bank, card and payment processor account each month, tie your books to your filed tax returns, and build a documented schedule of add-backs. Then keep closing each month on time until the sale closes, because lenders want current interim statements and compare them with the same period last year.
What 12 months can and can't fix
When a buyer finances the purchase with an SBA 7(a) loan, the lender's analysis "must be based on the three most recent year-end historical financial information using the highest level of financial reporting available" (SBA SOP 50 10 8.1, Appendix 15). The tax returns for those years are already filed. A year of work won't change them.
What a year does buy you:
- One clean trailing year, with every account reconciled monthly. It's the year a buyer looks at hardest.
- Current interim statements, closed on time, that compare cleanly with the same months last year.
- Written explanations for the earlier years: a reconciliation between each year's books and its tax return, and support for each add-back.
If your older books are messy, a clear explanation of each difference is usually worth more than re-entering years of transactions. A buyer can work with a documented difference. An unexplained one raises questions at the worst possible moment.
Who checks your books, and what they look for
Three groups usually read a seller's books: the buyer, the buyer's accountant or diligence firm, and, if the buyer is borrowing, the lender. When the loan is an SBA 7(a), the lender's checks are written down in the SBA's Standard Operating Procedure, SOP 50 10 8.1, published September 25, 2026 and in effect since October 1, 2026. These are the parts that touch your books:
| The lender must | What the SOP says | What it means for you |
|---|---|---|
| Check your numbers against the IRS | Verify the financial information behind the valuation "against the seller's IRS transcripts to ensure the accuracy of the information" | Your books and tax returns must agree, or the difference must be explained |
| Use the best statements available | Ranks reporting "(1) Audited Financial Statements, (2) Reviewed Financial Statements, ... (3) CPA Compiled Financial Statements, and (4) Corporate Tax Returns" | With tax returns alone, you're on the lowest tier |
| Get current interim statements | "Seller's interim financial statements no older than 120 days from date of submission to SBA," dated and signed or certified by the seller | Keep closing every month while you're listed |
| Compare them with last year | Analyze "the most current interim financial statement available along with the comparable interim financial statement from the previous year" | Categorize transactions the same way every month, so periods compare |
| Justify every add-back | "The justification for each adjustment or add-back must be included in the credit memorandum" | Hand the lender your support so they don't have to build it |
| Get a QoE at $3 million and up | Required for Business Expansion and Initial Acquisition purchases with a purchase price "equal to or greater than $3 million," measured before buyer equity and seller financing | Below that, SBA doesn't require one, though a buyer may still order one |
The lender also needs your financial statements for the last three complete fiscal years, dated and signed or certified by you within 120 days before the loan goes to the SBA. If you've ever signed off on a set of numbers you weren't sure of, this is the time to fix them.
The 12-month plan
Months 12 to 10: separate and reconcile
- Business spending only, in business accounts. Move personal charges off the business card and accounts now. Every personal cost left in the books becomes either an add-back you have to prove or an expense that lowers your profit.
- Reconcile every account, every month. That means bank accounts, credit cards, loans, and payment processors like Stripe, Square or PayPal. The chargeback in the opening story lived in a processor account that never made it into the books.
- Sort transactions the same way every month. A Searchfunder contributor, a professional based in New York, points out that the same costs often land in different accounts depending on who did the bookkeeping that quarter, and that those swings surface when the buyer's team runs a variance analysis (Searchfunder). Pick your categories, write them down, and stick to them.
Months 9 to 7: tie your books to your tax returns
For each of the last three years, put your books' net income next to the income on your tax return and list every difference. Common causes are tax depreciation that differs from book depreciation, year-end adjustments your CPA made that never went back into your books, and personal costs removed at tax time. Write one line for each, with the amount.
The same Searchfunder post warns that if your returns show less income than your profit and loss statement, a buyer using SBA financing can run into trouble, because lenders lean heavily on tax returns to underwrite and size the loan. Plan on the lender going by the returns.
Then do a proof of cash. Add up the deposits on your bank statements and compare them with the revenue in your books and on your return, setting aside transfers between your own accounts, loan proceeds, and money you put in yourself. SBA's rules describe the lender-side version, a "Cash Proof," as "reconciling bank statement data to the income statement and tax return for each period under review." If yours doesn't tie out, the Searchfunder author notes, the buyer's team will conclude the books aren't complete.
Cash or accrual. If you keep your books on a cash basis, ask your CPA whether to also prepare accrual-basis statements for the sale. The SOP lists "accounting methodology differences between cash-basis and accrual-basis reporting" among the adjustments a QoE must document. Changing the method you use for taxes is a separate decision with its own rules.
Months 6 to 4: build your add-back schedule
Seller's discretionary earnings (SDE) is your profit before one owner's compensation, interest, depreciation, amortization, and discretionary or one-time costs. Add-backs are the line items that take you from net income to SDE or adjusted EBITDA, and they're where buyers push hardest. The Searchfunder author's rule is short: "Every add-back needs a paper trail and a good memo." Without one, the author adds, even a legitimate add-back looks like an attempt to inflate earnings, and round-number add-backs draw extra scrutiny.
SBA's rules name the same categories. Among the cash flow adjustments a lender must justify are "Seller discretionary expenses; and/or Ownership Compensation."
| Add-back | Keep this as support |
|---|---|
| Owner's salary and benefits | Payroll reports, your W-2 or K-1, benefit invoices |
| Personal vehicle, phone or travel run through the business | The statements, and a note on the personal share |
| One-time costs (a lawsuit, a move, a major repair) | The invoice, and a line on why it won't recur |
| Family on payroll who won't stay after the sale | Payroll records and a description of their actual role |
| Interest, depreciation and amortization | Loan statements and the depreciation schedule |
Small personal add-backs like meals are the hardest to prove. The cleanest fix is the one from months 12 to 10: stop running them through the business, so next year's numbers need no add-back at all.
Months 3 to 1: pick your statement level and assemble the file
Look again at the SBA's ranking: audited, reviewed, CPA-compiled, then tax returns. For most small businesses a year out, a CPA-compiled or reviewed set of statements for the most recent year is the realistic step up from tax returns alone. Ask your CPA what each involves and how long it takes, since it has to be done before you list.
Then build a recast profit and loss statement that starts from net income, lists each add-back with a reference to its support, and ends at SDE or adjusted EBITDA. That one page is what a broker, a buyer and a lender will all ask for first.
Every month while you're listed: close on time
From listing to closing, every month you operate becomes part of the numbers the buyer reviews, and an SBA lender needs interim statements no more than 120 days old when the loan is submitted. Close each month within a few weeks of month end, compare it with the same month last year, and explain any big swing before the buyer asks. A month that slips is a month a buyer can't verify.
The documents to have ready
Most buyers and lenders ask for some version of this list. Having it in one folder before you list saves weeks once a buyer signs a letter of intent.
- Profit and loss statements and balance sheets for the last three complete fiscal years
- Business tax returns for the same three years
- Year-to-date statements, plus the same period last year
- Your reconciliation between books and tax returns for each year
- Bank, credit card and loan statements for the period the buyer is reviewing
- Payment processor statements (Stripe, Square, PayPal, or your card processor)
- Accounts receivable and accounts payable aging
- Your add-back schedule and recast profit and loss statement, with support
- Payroll reports and a list of employees and their pay
- A fixed asset and equipment list, with any loans or liens against it
- Leases, and contracts with major customers and suppliers
Do you need a sell-side quality of earnings report?
A QoE is an independent analysis of whether a business's earnings are real and likely to repeat. Under SOP 50 10 8.1, an SBA lender must get one for Business Expansion and Initial Acquisition purchases of $3 million or more. Owner buyouts, ESOPs and cooperatives are exempt.
The SOP also says the QoE "must not be prepared by or for the seller." So a sell-side QoE you commission won't satisfy an SBA lender's requirement. It can still be worth it if you're near or above the threshold and want to find problems before the buyer does. For a smaller sale, the reconciliations, proof of cash and add-back file in this plan are the do-it-yourself version of the same work.
Selling in Canada
The SBA's rules apply to US loans only. Canadian lenders set their own requirements, so ask the buyer's lender early what they'll want to see. The groundwork in this plan carries over: statements that agree with what you filed with the CRA, reconciled accounts, and documented add-backs.
See it from the buyer's side
Clef's blog for buyers, on tryclef.com, covers how a buyer tests these same numbers: cash flow reconciliation in due diligence, the financial red flags buyers look for, and how a lender calculates DSCR for an SBA loan. Reading them before you list shows you the other side's checklist.
Where Ruth fits
The monthly part of this plan is the part that slips when you're running the business and preparing to sell it at the same time. Ruth is Clef's AI bookkeeper, and she works by text. She sorts your transactions as they come in, texts you about a charge the day it shows up, and closes every month, matched to your bank statement. Connecting your bank or QuickBooks is optional. On Keeper, you can export your books as Excel, CSV or QuickBooks files to hand to a CPA or a buyer's accountant. She doesn't value your business, prepare a QoE, or replace your CPA. See how Ruth works.
This is general information, not legal, tax or financial advice. Talk to your CPA, and to a business broker or M&A attorney, about your sale.
Frequently asked questions
Do you need a CPA to prepare financial statements to sell a business?
No law requires it for your own statements, but it affects how a lender reads them. SBA's lending rules rank financial reporting as audited, then reviewed, then CPA-compiled statements, then corporate tax returns. Statements you prepare yourself aren't on that list, so a lender will lean on your tax returns. A CPA-compiled or reviewed set for your most recent year moves you up.
What documents do you need to sell a business?
At minimum: profit and loss statements and balance sheets for the last three complete years, the business tax returns for those years, year-to-date statements with the same period last year, bank and payment processor statements, receivables and payables aging, payroll reports, and a schedule of add-backs with support for each one.
Can you give me some examples of add-backs?
Common ones are the owner's salary and benefits, personal costs run through the business such as a vehicle or phone, one-time expenses like a lawsuit or a move, family members on payroll who won't stay after the sale, and interest, depreciation and amortization. Each one needs a document and a short explanation, or a buyer and their lender may not accept it.
Does SDE include owner salary?
Yes. Seller's discretionary earnings adds one owner's full salary and benefits back to profit, because it measures what the business earns for a single owner-operator. Adjusted EBITDA works the other way and deducts a market salary for the role.
How far back do buyers look at your books?
For an SBA-financed purchase, the lender analyzes the three most recent years of year-end financials, plus your current interim statements compared with the same period last year. When a quality of earnings report is required, it covers the trailing 12 months and the last two fiscal years.