How to Prepare for Investors, Lenders, or a Sale

How to Prepare for Investors, Lenders, or a Sale: Whether you’re preparing to sell your company, secure outside investment, or obtain growth capital, financial due diligence is the gateway to any major transaction. And while the term “due diligence” might sound like legal fine print, in reality, it’s a deep, strategic examination of your business’s financial truth.

For CEOs of businesses with $5M–$20M in revenue, preparing for due diligence is no longer optional, it’s foundational. A missed detail can delay your deal, decrease valuation, or erode buyer or lender trust. But when done right, it sets you up for a smooth, confident transaction and stronger financial leadership long after the ink dries.

Here’s what you need to know about financial due diligence, and what every serious buyer of your business, private equity firm, or lender is looking for when they open your books.

What Is Financial Due Diligence, Really?

Financial due diligence is a rigorous review of your company’s historical and projected financials. It answers critical questions, such as:

• Are the numbers accurate and complete?
• Are margins and cash flow trends sustainable?
• Are there financial red flags (e.g., tax liabilities, revenue concentration, inconsistent reporting)?
• Does the business’s financial performance support the valuation?

Unlike an internal review, this process is led by external advisors, investment firms, banks, or buyers, who will challenge assumptions, test the accuracy of your reporting, and assess the financial health and risks of your business.

This is where a Fractional CFO becomes essential. They not only prepare the financials but also help position your company to answer tough questions with confidence, clarity, and data.

Why It Matters More Than You Think

Too often, business owners assume their internal financial reporting is “good enough.” But under the scrutiny of a potential buyer or lender, inconsistencies, missing documentation, or unclear financial trends can raise red flags, or worse, sink the deal altogether.

Well-prepared financials don’t just satisfy outside parties, they position your company as a professionally run, trustworthy business. They speed up negotiations, increase valuation, and improve terms.

The 8-Part Financial Due Diligence Checklist

Let’s break down what’s typically reviewed and what you need to have ready for a successful due diligence process, whether you’re preparing for an acquisition, loan, or investment.

1. Clean, Organized Financial Statements (3–5 Years)

At a minimum, expect to provide:

• Profit and loss (P&L) statements
• Balance sheets
• Cash flow statements
• Year-end trial balances

Statements should be GAAP-compliant (or close), consistently formatted, and reconcilable to your tax filings and accounting software. If you’ve used multiple systems or accountants over the years, this is the time to clean it up.

Audited or CPA-reviewed financials lend credibility to your numbers. They confirm your financial position and give outsiders confidence that your internal controls and accounting practices are sound. Inconsistent or poorly formatted statements can lead to delays or discounted valuations.

A clean chart of accounts and a disciplined monthly close process build confidence and keep reviews moving smoothly.

2. Adjusted EBITDA Analysis

Buyers and banks rarely rely solely on net income. They focus on EBITDA, Earnings Before Interest, Taxes, Depreciation, and Amortization, and more importantly, adjusted EBITDA, which removes non-core or one-time items to better reflect ongoing operational performance.

Expect to show adjustments for:

• One-time or non-recurring expenses (e.g., legal settlements, restructuring)
• Owner’s compensation (if above or below market)
• Related-party transactions or intercompany charges
• Personal expenses run through the business (even small ones)

Adjusted EBITDA offers a normalized view of your company’s true earning potential. It helps buyers and lenders assess your operational profitability without distortion from personal or one-off costs.

A clear, CFO-prepared EBITDA bridge helps justify your valuation and prevent pricing pushback.

3. Revenue Quality and Customer Concentration

Revenue growth is a good start, but buyers want predictable, diversified, and contract-backed revenue streams.

They’ll evaluate:

• Customer concentration (are you too reliant on one or two clients?)
• Contract types (recurring vs. one-time vs. project-based)
• Retention rates and churn
• Revenue seasonality or cyclicality
• AR aging reports (are you collecting in a timely way?)

 A business with lumpy, unpredictable revenue or heavy reliance on a few customers is riskier. Buyers want to see that revenue will continue post-transaction and won’t evaporate if a key client leaves.

 If you have long-term contracts or subscription revenue, highlight this fact, it strengthens perceived stability.

4. Gross Margin Analysis by Product, Service, or Segment

Gross margins tell the story of operational efficiency, and they matter more than top-line revenue.

You’ll need to present:

• Gross margins broken out by line of business
• COGS definitions and methodology
• Margin trends over time (stable, rising, or shrinking?)
• Any recent changes in pricing or input costs

Declining or highly variable margins raise red flags. A buyer or lender wants to know that your profitability is sustainable and scalable. They’ll also compare your margins to industry benchmarks.

 Don’t just show margins, explain them. Context (e.g., a recent cost increase you’re addressing) shows leadership and transparency.

5. Cash Flow and Working Capital

Your business might be profitable, but if it doesn’t generate or manage cash well, that’s a problem.

Expect to review:

• Operating cash flow vs. net income
• Working capital cycle (receivables + inventory – payables)
• Inventory levels and turnover
• Timing of payables and collection cycles

Cash flow shows the real health of your business. A buyer or bank will want to know how much cash is required to maintain operations, and how that changes as you grow. Capital-intensive businesses must be especially prepared at this stage.

Demonstrating proactive cash management (e.g., renegotiated terms, early payment incentives) reflects operational maturity.

6. Debt, Liabilities, and Contingent Risks

This is where lenders and buyers assess what obligations they’re inheriting.

They’ll want:

• All debt schedules and loan terms
• Notes payable and lines of credit
• Deferred revenue or unearned income
• Tax notices, payment plans, or open audits
• Any pending or potential legal issues

Transparency is key. Undisclosed liabilities or unresolved legal matters can kill a deal or trigger unfavorable loan terms. Don’t wait for them to discover it, get ahead of it.

Keep a clean, updated liability schedule with notes on payment terms and maturity dates.

7. Tax Compliance and Historical Filings

Lenders and investors don’t want surprises, and neither do acquirers. You’ll need to show your tax history is clean and complete.

Include:

• Federal and state tax returns (3–5 years)
• Payroll tax filings and 1099 records
• Any tax planning strategies currently in place
• Correspondence with taxing authorities, if applicable

Inconsistent or late filings suggest poor financial controls. Tax liabilities can follow a business even after a transaction closes. Buyers want assurance that you’re compliant and not sitting on hidden risks.

Aligning your tax position with your financial statements avoids frustrating discrepancies in due diligence.

8. Internal Controls, Policies, and Financial Processes

Beyond numbers, due diligence assesses how your finance function operates. Buyers and banks want to know: Is this a well-run ship?

Expect to be asked about:

• Monthly close process and reconciliation practices
• Who reviews and approves spending or contracts
• Segregation of duties in accounting and finance
• How financial data is stored, backed up, and protected
• Use of accounting software and reporting tools

Strong internal controls signal a well-managed company. Weak controls can result in fraud, financial misstatements, or operational chaos, all deal-killers in the eyes of a sophisticated buyer or bank.

If you don’t have formal documentation, create it now. This is one of the easiest areas to improve quickly.

Preparing for financial due diligence isn’t just about producing documents, it’s about telling a confident, consistent story about your business’s past performance and future potential. A strategic partner like MOD Ventures can help ensure your financials aren’t just accurate, they’re compelling.

If you’re looking to sell, raise capital, or secure funding in the next 12–24 months, now is the time to get ahead of the curve.

Ready to prepare your business for what’s next?
Reach out to the MOD Venturesteam to learn how our Fractional CFO services can help you confidently navigate financial due diligence and position your company for lasting success.