The answer to what financials to look at when buying a business is your last full year and trailing twelve months, tied to the tax return, then an argument about the add-backs. BizBuySell's second-quarter 2026 deals closed at an average of 2.7 times cash flow, so a dollar of earnings you can prove is worth about $2.70 and one you cannot is worth nothing. From 1 October 2026, SBA-financed purchases of $3 million or more will need an independent quality of earnings review, and the lender will test coverage on history, not projections. With several companies, the first question is which is for sale and what it really pays the others.
The two years a buyer reads
Brokers ask for three years. BizBuySell's learning center says a buyer wants to see the last three years of financials at a minimum, and most listing packages are built that way. The buyer's accountant reads two of them closely: the last full year, and the trailing twelve months to the most recent closed month. The third is there for trend, and a dip in the middle year needs an answer better than "we had a big job the year before".
Trailing twelve months is the sum of the last twelve closed months, whatever month you are in. A buyer reading your books in October will not price the business on numbers that stop the previous December, and if the last three months are unreconciled the buyer waits or discounts.
The tie-out to the tax return
The buyer's first test is whether the P&L agrees with the return you filed. Not to the dollar, since book and tax differ on depreciation and a few other lines. Revenue should match. The gap on net income should be explainable in five minutes.
A gap you cannot explain moves the buyer from your P&L to your return as the base for the price, and the return is almost always lower because it was prepared to minimize tax. It also makes every other number suspect, which is when a buyer who planned a sniff test orders a full quality of earnings review instead.
A buyer also wants accrual, because accrual shows what you earned in the period rather than what landed in the bank. If your file runs on cash, the buyer's accountant will rebuild an accrual view from your invoices and bills, and it will not match the reports you have been reading. Cash or accrual in QuickBooks, and which one you are looking at explains how to tell.
Add-backs, sorted into three piles
An add-back is an expense on the P&L that a buyer agrees to add back to earnings because the new owner will not have to pay it.
Seller's discretionary earnings is net income plus interest, taxes, depreciation, amortization, one owner's full pay and the agreed add-backs. It is the profit figure most small deals are priced on, and it differs from EBITDA by adding back the owner's pay, on the theory that the buyer will run the business. How to calculate EBITDA for a small business covers the version a lender uses.
The add-back list is where the price gets argued, so sort yours into three piles before a buyer does.
The first pile survives: owner pay, all of it on an SDE basis; a one-off cost with paper behind it, such as a $14,700 transmission on a truck that is now fine; personal expenses run through the business, with receipts, if you are prepared to see them on a schedule the buyer's lender will read.
The second pile gets argued: a family member on payroll who does a real job, because the buyer will have to replace them; a vehicle you say the business does not need, when the crew uses it daily.
The third pile is dead on arrival: growth you expect, costs you plan to cut but have not, a contract signed but not started. A buyer prices what the business did. At BizBuySell's Q2 2026 average multiple of 2.7 times cash flow, a $20,000 add-back that survives is worth about $54,000 in price, and one that dies is worth nothing and costs some trust.
The balance sheet and the customer list
Sellers prepare for the P&L. Buyers spend nearly as long on the balance sheet, in a set order. Accounts receivable first, and specifically the 90-day-plus column of the aging, because old receivables are either uncollectable, so earnings were overstated, or from a slow payer, so the business needs more working capital than it looks. The AR aging report, explained for owners shows how to read yours first. Then inventory, and whether it has been counted this year. Then undeposited funds, which should be near zero and often is not. Then the debt schedule, because the buyer's lender wants to see what gets paid off at closing. Then any balance with a related party, which for a multi-company owner is the heading that takes longest.
Customer concentration is the share of revenue that comes from your largest customer or your largest few. A common rule of thumb says a buyer worries when one customer passes 20% of revenue. It is a rule of thumb rather than a threshold anyone enforces, and past it a buyer asks for the contract and the renewal date, and the price moves if the answers are weak.
Quality of earnings and the SBA trigger
A quality of earnings review is an independent accountant's examination of whether the earnings a seller reports are real and recurring. It is not an audit. It ties the general ledger to bank statements, payroll and tax returns, tests the add-backs, and reports on customer concentration and working capital. ProjectionHub's guidance puts one at $10,000 to $35,000 for deals between $100,000 and $10 million, with a sniff test available for under $1,000.
Since 1 October 2026 the lender has required it more often. Under the SBA's SOP 50 10 8.1, as summarized by SEK CPAs on 21 September 2026, a 7(a) change-of-ownership loan with a purchase price of $3 million or more, excluding owner-occupied real estate, needs a quality of earnings review by an independent professional, paid for by the buyer, covering the general ledger, tax returns, bank activity, payroll, receivables and customer concentration. Owner buyouts and ESOPs are exempt. The same SOP, per Pioneer Capital Advisory's 23 August 2026 summary, sets acquisition debt service coverage at 1.25 times, EBITDA over post-transaction debt service, on the last fiscal year or a two-year average, and says projections may not be relied on. With 78% of BizBuySell buyers expecting SBA money, your history is doing the underwriting. What the SBA now requires on DSCR covers the test.
The seller with more than one company
Brightline Electric is for sale. Its owner also holds the property LLC that owns the shop and a small holding company on top of both. The contractor's last full year shows net income of $187,300 on revenue of $2,640,000, after depreciation and interest of $41,900. Owner salary was $210,000, and on an SDE basis all of it comes back. The shop rent is $4,100 a month to the property LLC, $49,200 a year, when the space would lease to a stranger for about $6,800 a month, or $81,600. That is an add-back in reverse: the buyer deducts $32,400, because the new owner will pay market rent or buy the building. The holding company charges a $3,000 monthly management fee for nothing the contractor could not do itself, so $36,000 goes back in. The owner's brother-in-law runs dispatch at $58,000. He does a real job, and that is the second pile.
Seller's discretionary earnings, before the argued pile, is $187,300 plus $41,900 plus $210,000 plus $36,000 minus $32,400, or $442,800. At 2.7 times, that is a little under $1.2 million. Left for the buyer to find, the same items get adjusted in the buyer's favor, and the offer opens lower.
Then the balance sheet. The contractor shows a due-to the holding company of $118,600 that has not moved since 2023, and nobody remembers whether it was a loan or an unpaid fee. A buyer will not close on a company that owes money to the seller's other company until that balance is settled, forgiven with the tax consequences understood, or written into the purchase agreement. Due-to and due-from accounts, explained and intercompany transactions explained for owners cover how to clear them.
Navigator reads each of the owner's QuickBooks Online files read-only and keeps 24 months of history per entity on the base plan, about the two years a buyer will read. On the Pro plan, intercompany elimination shows what the contractor earns once the rent, the fee and the holding company balance are taken out, so the add-back list exists before the buyer's accountant writes it. Pricing is on navigatorhq.ai.
What to fix, and when
The common advice is to tidy the books the quarter before you list. We would start two years out. The buyer reads two years, and a clean-up that begins inside the trailing twelve months shows up as a break in the trend that then needs explaining.
Twenty-four months out, get every company on accrual and reconciled monthly, put the rent, the management fee and any loans between your companies on written terms at market rates, and take personal expenses out of the business. Twelve months out, settle or document the intercompany balances, chase or write off the 90-plus receivables, and have your CPA confirm the P&L ties to the return. The month before listing, close the trailing twelve months, write the add-back schedule with a line of evidence per item, and pull the customer list by revenue.
BizBuySell's Q2 2026 report found that the median sale took 155 days from listing to close, that 52% of owners have an exit plan and 14% have had a professional valuation, and that 90% of buyers expect seller financing while 29% of owners plan to offer it. Most sellers end up carrying a note, and a business that has to keep paying you after the buyer takes over is a second reason to want the books clean.
Questions owners ask
What financials does a buyer look at when buying a business?
Three years of P&Ls and balance sheets, the trailing twelve months, the matching tax returns, an AR and AP aging, a debt schedule, payroll by person, and revenue by customer. Bank statements come later, usually in diligence. For a company with sister entities, expect a request for every agreement between them and the balance of every intercompany account.
What is a quality of earnings report and who pays for it?
An independent accountant's review of whether reported earnings are real and recurring, tying the ledger to bank, payroll and tax records and testing the add-backs. The buyer usually orders and pays for it, at roughly $10,000 to $35,000 on small deals. Since 1 October 2026 the SBA has required one on 7(a) acquisitions of $3 million or more.
What are add-backs when selling a business?
Expenses on the P&L that a buyer agrees the new owner will not incur, added back to net income to arrive at seller's discretionary earnings. Owner pay, documented one-off costs and personal expenses with receipts usually survive. Family payroll and vehicles get argued. Expected growth and planned cuts do not count at all.
How many years of financial statements do I need to sell my business?
Three is the standard request, and BizBuySell's learning center calls it the minimum. The buyer reads the last full year and the trailing twelve months closely and uses the earlier year for trend. If the trailing months are not closed and reconciled, the buyer waits or discounts, so the most recent period matters more than the oldest.
Do buyers use tax returns or the P&L?
Both. The P&L is the starting point for the price and the return is the check on it. Revenue should agree, and the net income gap should be explainable by depreciation and a few book-to-tax items. Where the two disagree and you cannot say why, the buyer prices on the return, which is almost always the lower figure.
Related
Before you can sort the add-backs you need the base figure, and how to calculate EBITDA for a small business walks through it with the owner's pay left in and taken out. If the buyer is borrowing, the SBA's DSCR requirements under SOP 50 10 8.1 show what their lender will test your history against. And if the company for sale has sister entities, intercompany transactions explained for owners covers the entries a buyer's accountant will find first.
If you would rather find the problems before a buyer's accountant does, the free accounting health check is a place to start: navigatorhq.ai/health-check.
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Published . Last updated . Reviewed by a CFO on the Navigator team.