How Cleaning Up Your Books Increases Your Business Value

About the Episode

Stop letting questionable add-backs and messy books cost you hundreds of thousands on your business sale. Learn exactly what bank lenders, especially those focused on SBA 7(a) loans, will and will not accept when calculating your actual Seller’s Discretionary Earnings (SDE). Discover the concrete steps you must take now to ensure your financials are clean, verifiable, and support the highest multiple for your exit.

What is the valuation that I want for this business, and how am I working toward that right now?

Chip Higgins

What You’ll Learn

• Prioritize Clean, Verifiable Financials for Top Valuation: Understand that lenders prefer clean P&Ls with minimal add-backs because it indicates better business ethics and record-keeping, often resulting in a quarter- to half-point multiple increase on your business valuation. If you want top dollar, plan to run your business cleanly for at least two full years before sale.
• Verify All Add-Backs to Secure Financing: Do not expect a bank to accept non-reported income or unverifiable personal expenses—like cash income or comingled personal credit card charges—as legitimate add-backs for SDE calculation. The lender’s underwriting process requires clear documentation, such as separate records or third-party verification, to ensure they are not aiding in tax fraud.
• Ensure Salaries and Expenses Are Truly Discretionary: Avoid adding back compensation for family members or expenses like travel and charitable contributions if those roles or costs are essential to the business’s operation or revenue generation. Lenders use a key test: “If this went away, would the business be affected?”—if the answer is yes, you cannot add it back.
• Know the Bank’s Debt Service Coverage Ratio (DCR) is Your True Hurdle: Realize that a lender’s primary concern is the debt service coverage ratio (DCR), typically requiring at least 1.15x (often 1.3x to 1.5x internally) after subtracting a buyer’s salary. This ratio, not just the advertised multiple, is what determines the maximum price and financing structure your business can support.
• Fix P&L and Tax Return Discrepancies Early: Be aware that lenders will flag inconsistencies between your P&L and tax returns, which often result from switching between cash and accrual accounting to minimize taxes. Correcting these differences or obtaining a Quality of Earnings (QoE) report from a reputable third party can significantly strengthen buyer confidence and accelerate the due diligence process.

Topics Covered

Want More? Related Resources:

• Adjusting Financial Statements: A Complete Guide
• Quality of Earnings in M&A – The Ultimate Guide
• Preparing Financial Statements When Selling a Business

Meet Our Guest

Jared Johnson

Vice President and Senior Business Development Officer at First Internet Bank | Fort Worth, TX

A recognized industry leader, Jared Johnson has completed over $ 800 million in SBA lending during a career spanning more than 18 years. That involvement has given him a thorough understanding of the impact SBA Lending and small business acquisitions have on the economy and its importance to communities.

LinkedIn: https://www.linkedin.com/in/jaredwjohnson/