Preparing Your Balance Sheet for Exit Success

When most founders think about getting acquired, they focus on top-line growth, brand value, or customer acquisition.

But sophisticated buyers care just as much — sometimes more — about what’s underneath that growth.

Your balance sheet is where buyers go to find truth.

It reveals your financial maturity, your risk exposure, and the hidden strengths or weaknesses in your business model.

At Legacy Advisors, we coach founders to stop thinking of the balance sheet as just a quarterly finance artifact — and start using it as a strategic lever in preparing for an exit.

Because when it’s structured right, your balance sheet becomes a tool that:

Defends valuation
Speeds up diligence
Reduces buyer concerns
And drives better deal structure

Let’s dig into how.

Why the Balance Sheet Matters in M&A

Buyers use the balance sheet to assess:

Working capital – Will they have to inject cash post-close?
Debt and liabilities – Are there encumbrances or surprises?
Cash position – Is the business self-sustaining?
Asset quality – Are receivables collectible?
Deferred revenue – What obligations are already “paid for”?
Owner entanglements – Any personal expenses, loans, or distributions?

An optimized balance sheet communicates financial hygiene and operational control — two traits that build buyer confidence immediately.

Common Balance Sheet Pitfalls That Erode Deal Value

Here’s what often tanks deals or leads to discounts during diligence:

❌ Loans to founders or related parties
❌ Personal expenses buried in the business
❌ Uncollectible AR inflated on the books
❌ Old inventory with overstated value
❌ Deferred revenue not properly matched to service obligations
❌ Hidden liabilities (e.g., tax exposure, legal accruals)
❌ Vendor prepayments or deposits without clear contract terms

These items force buyers to claw back value — and sometimes walk away entirely.

How to Optimize the Balance Sheet: A Founder’s Guide

Let’s walk through the major balance sheet categories and how to improve each one from an exit-readiness perspective.

1. Assets: Clean, Real, and Relevant

Focus on quality over size.

Cash: Ensure your balance is reconciled and reflects actual availability.
Accounts Receivable: Remove or discount AR older than 90 days. Track historical collection trends.
Inventory: Regularly adjust obsolete or slow-moving stock. Don’t overstate.
Fixed Assets: Depreciate appropriately. Remove old or non-existent assets.
Intangibles: Only capitalize IP or goodwill with proper valuation and legal clarity.

💡 Tip from The Entrepreneur’s Exit Playbook: Buyers don’t want “heroic” assets — they want reliable, well-documented ones.

2. Liabilities: No Surprises

This is where buyers zoom in — fast.

Accounts Payable: Stay current. Aged payables create red flags.
Accrued Expenses: Document what’s owed and to whom.
Deferred Revenue: Tie every dollar to a clear obligation. Track delivery timelines.
Debt: Eliminate non-essential debt. Convert shareholder loans to equity if possible.
Contingent Liabilities: Disclose any legal or regulatory exposure early.

🚩 Red flag: If buyers discover off-books debt or late tax filings during diligence, they’ll demand structure — or walk.

3. Owner’s Equity: Simplify and Clarify

Cap Table: Maintain an up-to-date, investor-grade capitalization table.
Distributions: Avoid aggressive or undocumented owner draws.
Retained Earnings: Understand how this flows and appears over time.
Convertible Notes/SAFEs: Clean these up 12–18 months before exit.

The cleaner and more logical your equity structure, the easier it is for buyers to model proceeds and negotiate terms.

The Strategic Use of Balance Sheet Optimization in M&A

Balance sheet strength gives buyers permission to believe your narrative.

Let’s break down how founders can use that strategically:

Strengthen Working Capital

Buyers often peg working capital adjustments to a target derived from your historical balance sheet. A weak working capital position can:

Delay closing
Result in escrow disputes
Lead to a purchase price adjustment

Plan ahead:

Normalize AR and AP cycles
Stabilize cash flow
Build a 12-month trailing working capital average
Tie all changes to business seasonality or strategy

Remove Personal Entanglements

If the buyer sees:

Auto leases
Personal travel
Loans to yourself
Co-mingled expenses

…they’ll assume your financials can’t be trusted.

Clean these up 12–24 months before the deal. It’s not just about integrity — it’s about clarity.

Normalize Deferred Revenue

Deferred revenue reflects services you’ve been paid for but haven’t yet delivered. In SaaS or recurring models, this is normal — but needs to be carefully matched.

Otherwise, buyers fear they’re paying for work they’ll still have to do.

Our guidance:

Document service periods clearly
Match delivery and cash intake
Include deferred revenue schedule in your internal QofE
Reconcile monthly — not just at year-end

Highlight Asset Strength

If you’ve got:

Strong cash reserves
Unleveraged receivables
Valuable IP
Clean equipment records

Show them off.

Put this in your data room with:

A clean general ledger
Monthly balance sheet walk-forward
Fixed asset register
AR aging reports with collection history

Buyers need to trust what they see.

Legacy Advisors Podcast Insight

On the Legacy Advisors Podcast (listen here), we’ve talked about deals that looked great top-line — but fell apart because of bad bookkeeping and balance sheet confusion.

Ed and I both agree:

“You can’t clean up the balance sheet in diligence. It has to be right long before the LOI.”

That’s why the most successful exits start with financial hygiene — and the balance sheet leads the charge.

Case Study: Balance Sheet Optimization Led to 3 Offers

We worked with a founder who was looking to sell their logistics SaaS platform.

Before we engaged:

They had $6.4M in revenue and $1.2M EBITDA
AR had $380k aged past 120 days
Several owner perks and loans cluttered the books
Deferred revenue wasn’t reconciled by service period
IP ownership wasn’t clearly assigned to the business

In 9 months, we helped:

Clean up AR and start pre-close collection
Remove and document all owner transactions
Establish a deferred revenue schedule
Transfer IP from founder to company

The result?

Three competitive offers.
Two with 80%+ cash at close.
Final purchase price came in 18% higher than original expectations.

All because the financial foundation was rock solid.

What I Teach in The Entrepreneur’s Exit Playbook

A core theme of the book is that valuation is not just about growth — it’s about believability.

Buyers are trained to look for problems. Your job as a founder is to eliminate those problems before they ask.

And the balance sheet is where many of them hide.

Get ahead of it. Clean it up. Build your exit on solid ground.

Final Thoughts

Here’s the truth:

You can’t sell what you can’t explain.

And your balance sheet explains:

Where your value sits
How much is real
What’s at risk
And whether you’re ready for a buyer

Optimizing your balance sheet means removing noise, documenting reality, and aligning your financial foundation with the story you’re telling.

Founders who do this early:

Close faster
Defend valuation more easily
Face less structure
Get cleaner deals
Keep more of what they earn

So don’t wait until diligence.

Start now.
Build clarity.
And let your balance sheet support your exit — not sabotage it.

Frequently Asked Questions About Optimizing Your Balance Sheet for a Future Exit

Why is the balance sheet so important during the M&A process?

Because the balance sheet gives buyers a snapshot of your company’s financial foundation. It shows what you own (assets), what you owe (liabilities), and what’s left (equity). It tells them if your growth is built on sound economics or shaky assumptions. During M&A diligence, buyers scrutinize your balance sheet to assess working capital needs, cash flow strength, debt exposure, and any red flags that may require price adjustments or added deal structure. As Kris Jones emphasizes in The Entrepreneur’s Exit Playbook, a clean, organized balance sheet builds trust and allows you to tell a defensible story that supports valuation.

What are some common balance sheet mistakes that can hurt a deal?

The most common mistakes include:

Old or overstated accounts receivable that haven’t been collected
Owner loans or personal expenses buried in the company books
Deferred revenue that isn’t properly reconciled to services delivered
Undisclosed liabilities like unpaid taxes or pending lawsuits
Obsolete inventory or fixed assets listed at inflated values
Messy cap tables or equity accounts that are unclear or poorly documented

Each of these issues introduces uncertainty. And uncertainty leads to buyer risk — which leads to reduced purchase price, increased structure, or worse, a failed deal.

When should I start optimizing my balance sheet before an exit?

Ideally, you should start 12–24 months before you plan to sell. That gives you time to:

Clean up personal entanglements
Normalize AR and AP cycles
Implement deferred revenue schedules
Eliminate non-core liabilities
Work with a controller or CFO to build GAAP-compliant books
Run internal monthly balance sheet reviews to track progress

This isn’t something you fix during diligence. Buyers expect your financial house to already be in order before they write an LOI. Advance preparation helps you avoid panic corrections and gives you stronger leverage when negotiating valuation and structure.

How does the balance sheet tie into working capital negotiations?

In most deals, buyers set a working capital target based on your historical balance sheet — typically a 12-month average. If your working capital falls short at closing, the shortfall comes out of your proceeds. If it exceeds the target, you get a credit. But if your balance sheet is disorganized, has aged receivables, inflated payables, or misstated accruals, buyers will:

Adjust the target to favor themselves
Delay the close to do more diligence
Use the messiness to justify holding more in escrow

A clean, stable balance sheet gives you a fair target and more control over what you take home.

How do I present a buyer-ready balance sheet during the sale process?

Start by making sure your balance sheet:

Ties out monthly to your income statement and cash flow
Includes clear schedules for AR, AP, inventory, and fixed assets
Properly reflects deferred revenue obligations
Has legal documentation to support equity, loans, and IP ownership
Shows logical changes over time (no unexplained spikes or drops)

Then include it in your data room alongside:

A balance sheet walk-forward
A trailing 12-month working capital average
AR aging reports
Debt repayment or amortization schedules
A fixed asset register
Clear commentary on changes and assumptions

This level of transparency gives buyers confidence — and confident buyers offer better terms.