Preparing Your Financials Before Selling Your Contracting Business

Financial preparation is not simply handing a buyer your tax returns. It is proving the financial story of the company. A buyer needs to understand where the money comes from, where it goes, how consistently the company produces profit, and whether those results can continue after the owner leaves.

Start With the Accounting System

One of the first questions BBC should ask is: What financial system are you running your business on, and can we trust the information coming out of it?

The company may use QuickBooks, Sage, Xero, or a contractor-specific accounting or ERP platform. The brand matters less than whether the system is being used correctly, consistently, and in enough detail to explain the business.

For a contractor, the accounting system should separate revenue and costs into meaningful categories such as service, maintenance, replacement, new construction, projects, and individual divisions where appropriate. Project-driven contractors should also be able to produce reliable job-costing, work-in-progress, backlog, retainage, and billing information.

Do They Actually Close Their Books Every Month?

This should be a basic BBC financial-health test.

If we ask an owner, “What did you make last month?” can the owner show us?

A well-prepared company should maintain monthly profit-and-loss statements and balance sheets, reconciled bank and credit-card accounts, accounts-receivable and accounts-payable aging, payroll records, loan balances, and, where applicable, WIP and job-cost reports.

If the owner only learns how the business performed when the accountant prepares the annual tax return, that is a weakness that should be corrected well before the company goes to market.

Build a Clean Financial History

For valuation and sale preparation, the goal is to create a financial history that a buyer, CPA, lender, or valuation professional can follow and verify.

Financial Information to Compile

• Three years of business tax returns.
• Three years of year-end profit-and-loss statements and balance sheets.
• Monthly profit-and-loss statements for the historical period.
• Current year-to-date and trailing-12-month financial results.
• General ledger and trial balances.
• Bank and credit-card statements and reconciliations.
• Accounts-receivable and accounts-payable aging reports.
• Payroll records, including owner compensation and benefits.
• Debt schedules and vehicle/equipment loan balances.
• Fixed-asset, vehicle, and equipment lists.
• WIP, backlog, retainage, and job-cost reports for project contractors.
• Revenue and gross profit by service line, division, and major customer where possible.
• Recurring service and maintenance agreements.
• Customer concentration information.
• Related-party transactions, leases, and rent.
• Documentation supporting owner expenses, unusual expenses, and legitimate one-time costs.

Normalize the Earnings

The tax return may show one level of profit, but that does not necessarily tell us what the business economically produces for an owner or a buyer.

The company may pay the owner a salary and benefits. There may be discretionary owner expenses, unusual legal or professional expenses, family compensation, nonrecurring costs, or other items that require review.

Those adjustments need to be identified and documented. They should never simply be added back because the seller wants a higher valuation. Unsupported adjustments can damage the credibility of the seller and the financial presentation.

Depending on the size and structure of the business, the valuation discussion may focus on Seller’s Discretionary Earnings (SDE), normalized EBITDA, or another appropriate earnings measure.

Understand the Quality of the Revenue

Two contractors can have exactly the same annual revenue and still have dramatically different values.

A buyer will want to know how much revenue is recurring, how concentrated the customer base is, which divisions are most profitable, whether margins are stable, how much work is already under contract, and whether the company’s revenue depends heavily on the owner’s personal relationships.

A Simple BBC Comparison

Imagine two electrical contractors each producing $5 million in annual revenue and approximately $700,000 in apparent earnings.

Contractor A has three years of reconciled monthly financials, accurate job costing, clean payroll records, documented adjustments, customer and service-line reporting, current WIP schedules, and financial statements that can be reconciled to tax returns and supporting records.

Contractor B also produces $5 million in revenue, but the books are updated sporadically, personal and company expenses are mixed together, jobs are not properly costed, and nobody can clearly explain inconsistencies in the financial reports.

Those are not the same $5 million businesses.

What BBC Is Trying to Determine

• How accurate and current are the books?
• How many years of reliable financial history exist?
• Are the financial statements reconciled monthly?
• Can revenue and profit be analyzed by division or service line?
• Is job costing reliable?
• Are owner expenses and legitimate add-backs documented?
• Are accounts receivable collectible and accounts payable current?
• Are debt and equipment obligations clearly documented?
• Is recurring revenue identifiable?
• Is customer concentration understood?
• Can the company’s earnings be reproduced without the current owner?

“Good financial records don’t create the profitability of your business. They prove it.”

When selling a company, what an owner can prove is far more valuable than what the owner can simply say. BBC’s role is to help the contractor organize the financial story, identify weaknesses before a buyer finds them, and build a business whose value can be demonstrated with credible records.