Your books are probably fine.
Fine meaning: your bookkeeper closes the month, your CPA files the return on time, and you know roughly what last year looked like. Nobody has ever complained.
Fine is the problem.
The first person who will read your financials with real intent is an analyst working for a buyer, not your accountant. Their job is to find every reason your number should be lower than you think it is, and skepticism is cheap when the other side cannot answer questions quickly.
Financial hygiene gets filed under administration, somewhere below sales and hiring and the shoot that has to be delivered by noon. Filed wrong. It is one of the few things that raises your price without requiring you to sell a single additional job.
Buyers price what they can verify
Picture two agencies in the same market. Same revenue, same real earnings, same client mix, same quality of work.
The first can produce a monthly profit and loss statement going back three years, revenue broken out by product line and client, owner compensation at a market rate, and every personal expense identified. The second has a bookkeeping file where the truck, the family phone plan, a one-time legal fight, and the founder's health insurance all sit inside operating expenses, and revenue arrives as a single line.
Same business. Not the same price.
A buyer cannot pay for earnings they cannot verify. That is not a negotiating tactic, it is how the money works: the buyer is borrowing against those earnings, and their lenders will ask the same questions they are asking you. Every number that requires a story becomes a number they discount, and because everything runs through the multiple, an add-back you cannot document costs you its face value multiplied.
Matt Giesow, who coaches owners in the group and ran his own agency for years, reduces what the buyer's side asks to three questions.
All they care about is how much profit are you making. So if there's a greater profit margin, the better. And does it run without you? … How transferable is it without you?
The smallest version of this played out years ago, and Don, who hosts the ACRE Process Labs, told it in August. A rival agency was shutting down and offered him its business for $100,000. He declined and waited.
Had he come to us and said, like, hey, here's my business on a platter. Here's my CRM, here's what everybody spends. Here's the value of it. Here's my revenue. You know, maybe we would have considered it a little bit more, but he didn't have any of that stuff. And we just waited.
Once the work is done, this usually runs in your favor. Most owners who have never been through a sale underestimate their own adjusted EBITDA, the earnings figure that drives agency valuations, and clean books usually reveal that the business earns more than they thought.
The add-backs you can't document aren't add-backs
Adjusted EBITDA is earnings before interest, taxes, depreciation, and amortization, with adjustments layered on top. Each one is legitimate. Each one has to survive contact with someone who does not know you.
Personal expenses run through the business. The vehicle, the phone plan, the travel that was two-thirds vacation, the family member on payroll who does not really work there. All of it is a genuine add-back, because a new owner would not incur those costs, but it has to be identified line by line, with dates and amounts. A lump sum labeled "owner discretionary" reads as a request, not evidence.
One-time costs that will not recur. A lawsuit, an office move, a failed executive hire, a software migration that ate two quarters. Each can come back out of the earnings picture if you can show when it happened and why it will not happen again. "Will not recur" is a claim. Dated documentation is proof.
Owner compensation normalized to market. This is the adjustment owners get wrong most often, and it moves in both directions. Pay yourself far below what it would cost to hire someone to do your job and the difference comes out of earnings. Pay yourself well above market and most of that gap is earnings the business genuinely produced. The honest question is what a capable general manager would cost in your market. On the August audit, the owner's salary was booked at about $33,000 against $67,000 of seller's discretionary earnings, and it was the first thing the advisor raised: "that just needs to be proved because as is right now, a buyer could argue that it's more, it's less and they can discount off the back of that."
An add-back you can document is earnings. An add-back you assert is an argument, and you will lose it, because the person across the table does this fifty times a year and you are doing it once.
