You’ve finally received what you’ve been working toward for years: a serious buyer is interested in your company.
There’s excitement—and then the request list hits your inbox:
- 3–5 years of financials
- Detailed revenue breakdowns
- Tax returns and notices
- Working capital, debt, and lease schedules
- Forecasts and “normalized” EBITDA
What felt like a clean story in your head suddenly turns into a knot in your stomach.
“Will these numbers hold up?”
“What are they going to find that we haven’t looked at in a while?”
“Are we about to give them reasons to lower the price—or walk away?”
Every buyer and QoE (quality of earnings) team looks for the same financial red flags. If they see them, you lose leverage. If they don’t, you protect (and often increase) your valuation.
This guide walks through the top 9 financial red flags buyers watch for—and how to fix them before they see them.
Red Flag #1: Messy, Unreconciled Books
If your financial statements don’t reconcile cleanly, that’s the fastest way to kill trust.
What this looks like
- Bank and credit card accounts don’t tie to the general ledger.
- Old “suspense” or “ask my accountant” accounts litter the balance sheet.
- Month-end close is inconsistent—or doesn’t really happen.
- Different versions of the same P&L exist in Excel, the accounting system, and the “investor deck.”
Why it scares buyers
- They can’t tell whether issues are cosmetic or fundamental.
- They will assume there’s more wrong than they can see and discount accordingly.
- Their QoE firm has to rebuild your numbers, which costs time and goodwill.
How to fix it before they do
- Implement a disciplined monthly close (even if you haven’t historically).
- Reconcile all bank, credit card, and loan accounts—no exceptions.
- Clean out old balances that don’t belong, with documentation for adjustments.
- Lock prior periods once finalized to avoid accidental changes.
Goal: A buyer can tie your trial balance to your financial statements and bank accounts without needing a detective.
Red Flag #2: Cash-Basis, Tax-Only Numbers (No Real Financial Reporting)
If your “financials” are just whatever your tax preparer used, you’re not ready for diligence.
What this looks like
- Only annual, tax-basis reports; no monthly or quarterly management financials.
- No accruals for revenue, expenses, or timing differences.
- No clear separation between cost of goods sold, operating expenses, and one-offs.
Why it scares buyers
- They can’t see trends over time (seasonality, growth, margin changes).
- Cash-basis obscures true profitability and working capital needs.
- It signals that finance hasn’t kept pace with the scale of the business.
How to fix it before they do
- Convert to accrual-based financials, at least for the last 2–3 years.
- Build monthly P&L, balance sheet, and cash flow statements.
- Work with a CPA or Fractional CFO to align with GAAP-lite (even if you don’t go full GAAP).
Goal: You can show how the business actually performs over time—not just what you paid tax on.
Red Flag #3: Commingled Personal and Business Expenses
Nothing makes a buyer nervous faster than seeing your business used as a personal wallet.
What this looks like
- Travel, vehicles, meals, and “miscellaneous” expenses that clearly mix business and personal.
- Owner perks buried in operating expenses with no documentation.
- Personal loans, repayments, or transfers flowing through business accounts.
Why it scares buyers
- They can’t tell what true run-rate expenses will be post-close.
- It raises questions about governance, controls, and professionalism.
- It becomes harder to defend add-backs they see as “aggressive.”
How to fix it before they do
- Stop commingling—today. Use separate accounts and cards, always.
- Identify and isolate owner-related expenses for the last 2–3 years.
- Build a clear EBITDA bridge that shows these as add-backs with support (invoices, policies).
- Implement a formal owner reimbursement policy going forward.
Goal: Personal items are transparent, documented, and easy to adjust out—rather than hidden inside the P&L.
Red Flag #4: Unclear Revenue Quality and Customer Concentration
Buyers don’t just ask “How much revenue?”—they ask “What kind of revenue?”
What this looks like
- No breakdown of recurring vs one-time revenue.
- No clear view of revenue by product, channel, or customer segment.
- Two or three customers quietly make up 40–70% of revenue—but this isn’t obvious in your reports.
Why it scares buyers
- They can’t judge how stable the revenue is.
- Hidden concentration risk can be deal-breaking if a major customer is not locked in.
- They worry that revenue is more volatile than the top-line suggests.
How to fix it before they do
- Break out revenue by type (recurring vs project vs one-time).
- Create simple schedules showing:
- Top 10 customers and % of revenue
- Revenue by product, service, or region
- Document contract terms for key customers (renewal, termination, pricing).
Goal: You can explain not just how big your revenue is, but how durable and diversified it is.
Red Flag #5: Unexplained Margins and COGS
Thin or volatile margins with no narrative are a classic red flag.
What this looks like
- Gross margin jumps around from month to month with no clear reason.
- COGS includes a grab-bag of items (labor, overhead, random expenses) with no policy.
- Discounts, returns, and allowances aren’t consistently recorded.
Why it scares buyers
- They can’t tell if margin swings are due to pricing, product mix, operations, or errors.
- They worry there’s no grip on unit economics or cost structure.
- It undermines confidence in your forecasts and growth story.
How to fix it before they do
- Define a clear COGS policy (what is COGS vs operating expense) and apply it consistently.
- Analyze gross margin by product, service line, channel, or project.
- Identify and explain major margin shifts (new supplier, pricing change, one-time promotions).
- Build simple unit economics that tie back to your financials.
Goal: When buyers ask “Why is margin different here?”, you have crisp, data-backed answers.
Red Flag #6: Aggressive or Sloppy Add-Backs (Adjusted EBITDA)
Your adjusted EBITDA is the number everyone will focus on—and buyers will attack weak add-backs.
What this looks like
- Long lists of add-backs with vague labels (“one-time,” “non-recurring”) but no support.
- Items you call non-recurring that clearly repeat every year.
- No audit trail from net income to EBITDA to adjusted EBITDA.
Why it scares buyers
- They assume you’re inflating earnings or hiding recurring costs.
- Their QoE team will strip out most of what they can’t verify.
- It makes them question the rest of the financial story.
How to fix it before they do
- Build a clean EBITDA bridge with three steps:
- Net income → EBITDA → Adjusted EBITDA
- For each add-back, document:
- What it is
- Why it’s non-recurring or non-operational
- How you calculated it, with invoices/agreements
- Work with a seasoned advisor to ensure your list is credible, not wishful.
Goal: Your adjusted EBITDA is something buyers can accept—not something they feel obligated to discount.
Red Flag #7: Tax Exposure and Unresolved Issues
Tax surprises are deal poison.
What this looks like
- Late or missing returns in certain states or entities.
- Outstanding notices from tax authorities that “we’ve been meaning to deal with.”
- Sales/use tax, payroll tax, or nexus issues in multiple jurisdictions.
- Aggressive positions with no supporting memo.
Why it scares buyers
- They may inherit back taxes, penalties, and interest.
- Unknown tax risk leads to price reductions, escrow, or indemnity demands.
- At worst, they may walk away from deals with unclear exposure.
How to fix it before they do
- Get current on all filings—federal, state, local, sales/use, and payroll.
- Pull transcripts and notices; quantify your exposure where issues exist.
- Work with a tax advisor to document positions and remediation plans.
- Prepare a concise tax risk summary for buyers instead of letting them discover issues themselves.
Goal: Tax is understood, quantified, and being actively managed—not a lurking unknown.
Red Flag #8: No Real Cash Flow or Working Capital Visibility
Revenue doesn’t kill companies—cash flow does. Buyers know this.
What this looks like
- No 13-week cash flow model.
- Limited understanding of seasonality or cash cycles (collections, payables, inventory).
- No clear view of the working capital needed to run the business.
- Frequent fire drills to make payroll or pay key vendors.
Why it scares buyers
- They can’t tell how much working capital they’ll need to inject.
- They worry about hidden liquidity issues under the surface.
- Banks and lenders become more conservative in their support.
How to fix it before they do
- Build a 13-week cash flow forecast and roll it forward weekly.
- Analyze AR, AP, and inventory (if applicable) to understand your cash conversion cycle.
- Quantify your normalized working capital—what’s truly needed to run the business.
- Show how you’ve improved cash discipline over time (terms, reserves, policies).
Goal: Buyers can clearly see how cash moves through your business—and that you already control it.
Red Flag #9: No Forecast, No KPIs, No Data Room
If you’re selling your company without a forward view and organized data, you’re negotiating blind.
What this looks like
- No formal budget or forecast—just a rough idea in your head.
- No consistent KPI tracking (LTV/CAC, churn, cohort retention, utilization, etc.).
- Data room thrown together only after LOI, under time pressure.
Why it scares buyers
- They can’t see how your story plays out over the next 1–3 years.
- They worry you’ve been running the business on gut, not data.
- Constant delays answering basic questions erode trust and leverage.
How to fix it before they do
- Build at least a 1–3 year forecast (base, upside, downside) tied to real drivers.
- Identify and track the handful of KPIs that actually drive your model.
- Start a data room now, even if you’re not in a live process:
- Financials, taxes, legal, customers, HR, IP, operations
- Assign ownership—who updates what, and how often.
Goal: When buyers ask for information, you can share it quickly, consistently, and confidently.
What “Red-Flag-Free” Looks Like When You Go to Market
You’re in a strong position when you can say, honestly:
- Our books are clean, reconciled, and accrual-based.
- Our revenue, margins, and unit economics are explainable and documented.
- Our add-backs and adjusted EBITDA are defensible, not wishful.
- Our tax exposure is identified, quantified, and under control.
- Our cash flow and working capital needs are modeled and communicated.
- Our forecasts and KPIs are tied to reality—not just a pitch deck.
- Our data room is organized before anyone asks for it.
If you’re 12–24 months away from a potential exit—or simply want the option—this is the standard buyers are using, whether anyone has said it out loud yet or not.
How Northstar Finance Turns “Deal-Killing” Into “Deal-Ready”
For most founders, selling the business is the single biggest financial event of their life. You shouldn’t have to learn GAAP, QoE, and M&A norms at the exact moment you’re trying to negotiate the best possible outcome.
Northstar Finance is built to make your numbers buyer‑grade long before a process starts—so the financial side of your deal becomes an asset, not a liability.
Bookkeeping and Accounting
We help you move from “good enough for taxes” to due-diligence‑ready accounting:
- Rebuild or clean historical ledgers so they’re consistent, accurate, and auditable.
- Implement a reliable monthly close process:
- Bank and credit‑card reconciliations
- Accruals and revenue recognition
- Variance analyses that explain the story behind the numbers
- Structure your chart of accounts for clarity:
- By segment, product line, location, or business unit—so buyers can see where value is created.
Tax Compliance and Strategy
We align your books with your tax reality:
- Reconcile financial statements to filed returns.
- Identify and quantify federal, state, and sales tax exposures before buyers do.
- Help you resolve key issues (nexus, prior‑year adjustments, notices) so they don’t become deal-breakers.
Fractional CFO & Exit Planning Support
We act as your financial counterpart throughout your exit:
- Normalize EBITDA and document add-backs buyers will accept.
- Build and maintain your financial data room:
- Exit‑focused reporting packs
- Supporting schedules for QoE and buyer analysis
- Join calls with buyers, lenders, and their advisors to:
- Answer technical questions
- Protect your valuation narrative
- Keep diligence moving on your timeline
The goal: when a serious buyer shows up, your numbers are a strength, not a question mark.
Make Your Numbers Your Strongest Negotiating Tool
An LOI is a starting line, not the finish line. The real negotiation happens in diligence—when your story meets your numbers.
Clean, deal‑ready financials:
- Defend your valuation
- Shorten deal timelines
- Reduce the need for heavy earn‑outs and holdbacks
- Give you confidence walking into every meeting
The time to fix financial red flags is before the buyer’s team opens your data room.
If you’re planning an exit in the next 1–3 years—or simply want to be ready when the right buyer calls—consider this your prompt to start.
👉 Talk to Northstar Finance so the next time you’re selling your company, the only surprises are positive ones.
