Selling a Business: The Importance of a Forensic Financial Analysis
23 March 2026: Selling a Business: The Importance of a Forensic Financial Analysis
When beginning to consider selling a business, many business owners assume deals fall through because of financing issues or market shifts – problems they have little or no control over. But the real reason businesses don’t sell is often much simpler: buyers lose confidence in the financials.
While a business may appear profitable at a high level, deeper due diligence frequently reveals inconsistencies, informal accounting practices, or unclear assumptions—quickly eroding trust and, ultimately, valuation.
Why Don’t Businesses Sell?
This problem is widespread. Roughly 80% of businesses brought to market don’t sell – and won’t until the reason they don’t sell is corrected. There are more than a dozen reasons businesses don’t sell but there are three predominant ones:
- Overly aggressive price expectation: a polite way of saying the seller wants much more than the business is worth;
- Poor representation: a polite way of saying the seller is going to try to sell their business themselves or list it with their niece, the new real estate agent, and;
- Chaos in the financials and/or corporate books. (There’s no polite way of saying that.)
Aside from the poor representation part, the other two issues arise during due diligence.
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Buyer Due Diligence
One of the most critical and crucial phases of the process of selling a business is due diligence.
During due diligence buyers move beyond surface-level reports to validate earnings, and even profitable businesses can stumble if the seller has not prepared the business for the level of scrutiny due diligence involves. For example, unless a properly trained broker or advisor is involved and a financial recasting is performed, a thorough due diligence is likely to reveal inconsistencies in its financials resulting in confusion and uncertainty in buyers – and a higher perception of risk and loss of confidence.
The owners of many small and lower middle market businesses are less than meticulous in not only properly categorizing income and expenses but often run expenses that are personal through their business. A buyer’s due diligence of an otherwise strong company may begin to wane as red flags begin to flutter. This is particularly true if, as is often the case, the owner mixes personal expenses with business costs or applies inconsistent revenue recognition and no financial recasting is performed before coming to market clarifying what, to the buyer, appears to be financials that make no sense.
Buyers aren’t purchasing past profits; they ask themselves, “What will this business put in my pocket over the next few years?” They have to have confidence in the answer. Their plan is to invest in a business with the expectation that the financial results shown by your business will continue. To have confidence is such expectation, the historical results most be clear, easy to understand and essentially bullet-proof; as invulnerable to attack as possible.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
Buyer Confidence
When financials require too much explanation, buyers may assume inaccuracies – such as overstated earnings, unsustainable revenue or missing or misstated expenses – exist even if those concerns aren’t entirely accurate. This, in turn, raises the perceived level of risk and thus lowers confidence and enthusiasm; and ultimately value. As a result, astute buyers focus less on headline EBITDA and more on the reliability and quality of earnings behind it.
Check out our series The 6 Essential Elements of Selling a Business Successfully (starting 2 February ’26) on our YouTube channel.
Buyers who know what they’re doing prioritize financial fundamentals: cash flow consistency, revenue stability, working capital requirements, and balance sheet accuracy. This scrutiny has intensified in recent years as buyers increasingly rely on third-party quality-of-earnings analyses
The Bottom Line
One of the main reasons so many businesses fail to sell when the first come to market is because business owners have not properly prepared their business for this level of diligence.
Successful sellers take a different approach. They treat financial reporting as a strategic asset, presenting clean financial statements, having a forensic recasting done to identify personal expenses, reconciling accounts regularly, clearly documenting accounting policies and, based on the new-found accuracy of the business’ numbers, establish a defensible value and price their business accordingly. To accomplish all this, they work with advisors who understand transaction-level expectations.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@*******************og.com.
Check out our video series, “How Much is My Business Worth“on our YouTube channel.
“And the day came when the risk to remain tight in a bud was more painful than the risk it took to blossom.”
–Anais Nin
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@*******************og.com
