Financials First: What Valuers Look for in Your Numbers

When it comes to preparing for a business valuation, your financials are the first and most critical place to start. Why? Because they are the foundation of almost every valuation method used by professionals—whether based on earnings, cash flow, or asset values.

But it’s not just about having the numbers. It’s about having the right numbers, presented in a way that reflects the true financial position and performance of your business. In this article, we explore what valuers look for in your financials, how to prepare, and what common pitfalls to avoid.

1. Get Your Financial Statements in Shape

At a minimum, valuers will want to see your financial statements for the last three to five years, including:

• Profit & Loss Statements (P&Ls)
• Balance Sheets
• Cash Flow Statements

These should ideally be prepared or reviewed by a qualified accountant, using consistent accounting policies.

Tips:

• Ensure financials are finalised, not drafts or management-only versions.
• Avoid material changes from year to year in how items are categorised—consistency supports credibility.
• Ensure your inventory values reflect your accounting policy (FIFO, LIFO, Weighted Average Cost) as this could reallocate gross profits and margins into other years.  You need to present a true trading picture.
• Include notes for any major variances, anomalies, or one-off events.

2. Normalise Your Earnings

One of the most important steps in preparing for a valuation is normalising your financials. This means adjusting reported earnings to reflect the true ongoing profitability of the business.

Common adjustments include:

• Owner’s remuneration: If you pay yourself above or below market salary, adjust to a market rate (which can be supported).
• Personal or discretionary expenses: Remove expenses that benefit the owner but aren’t required to operate the business (e.g., personal vehicles, travel, memberships).
• One-off costs or income: Remove non-recurring items like legal settlements, one-time consulting fees, or COVID-related subsidies.
• Non-operating income or expenses: Exclude revenue or costs unrelated to core operations, like investment income, unusual FOREX movements or the sale of assets.

These adjustments give a more accurate picture of the business's sustainable earnings, which is often the basis for valuation multiples.

3. Understand and Present Key Financial Metrics

Once your financials are clean and normalised, be ready to discuss and explain your key performance metrics.

These may include:

• EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation): A common measure of operational profitability.
• Gross Margin and Net Margin: Indicators of cost efficiency and bottom-line performance.
• Revenue growth trends: Are you growing, stable, or declining?
• Working capital requirements: How much funding is tied up in receivables, inventory, and payables?
• Inventory turnover: How many times a year are you turning inventory over? This indicates whether too much cash is tied up in inventory and thereby inefficiencies.  It can identify Slow or Obsolete Stock (SLOB) and what should be the optimal amount of working capital required.
• Cash flow trends: Are you consistently generating free cash flow? It may indicate a debtor collection problem and slow payers.

Providing a simple summary of these metrics across several years helps valuers see trends and assess the financial health of the business.  A trend is more than one year.

4. Forecasts Matter – But They Must Be Credible

Most business owners focus on past performance—but forward-looking projections can also impact valuation, particularly for growth businesses.

Prepare financial forecasts for the next 12 to 36 months, with:

• Revenue and expense assumptions clearly stated
• Justification for growth rates or margin improvements
• Linkages to known events (new contracts, product launches, cost savings)

But a word of caution: Overly optimistic projections without supporting evidence can damage credibility. Conservative, well-supported forecasts are better than unrealistic optimism.  The forecasts should reflect the strategy, not the other way around.

5. Review Your Balance Sheet

Your balance sheet reflects the financial structure of your business. Before a valuation, take the time to:

• Reconcile your assets and liabilities: Make sure balances are accurate and reflect reality—particularly receivables, inventory, loans, and provisions.  Holiday Pay should be provided for.
• Assess non-operating or surplus assets: Identify any assets not essential to the core business, such as excess cash, investments, or property. These can be treated separately in the valuation.
• Clarify shareholder loans and related-party transactions: Ensure any intercompany balances, shareholder loans, or personal guarantees are documented and explained.

Valuers may adjust the balance sheet for fair value purposes, so clear and up-to-date records are key.

6. Address Debt and Capital Structure

The presence of debt or other financial obligations doesn’t necessarily reduce the value of your business—but it does impact the analysis.

Provide full details of:

• Outstanding loans (terms, interest rates, repayment schedules)
• Lease obligations (particularly with new accounting standards)
• Contingent liabilities or pending legal matters
• Capital contributions and shareholder equity structure

In most valuations, the value of the business (enterprise value) is calculated independently of debt, and the final equity value is adjusted for these obligations.

7. Align Financials with Tax Records

Valuers often request a review of your filed tax returns, especially in owner-managed businesses where private and business activities may be intertwined. Inconsistencies between tax filings and accounting records can raise questions.

Ensure that:

• Tax returns are consistent with financials (or any differences are explained)
• You’re up to date with IRD obligations
• There are no undisclosed tax risks (e.g., GST, PAYE, transfer pricing)
• The Imputation Credit Account is reconciled.

Having a tax advisor review this in advance can prevent surprises during due diligence.

8. Document, Explain, and Be Transparent

No one expects perfection—but valuers (and future investors or buyers) appreciate clarity and transparency.

Be ready to:

• Provide documentation to support adjustments
• Explain historical trends or anomalies
• Disclose any areas of uncertainty or upcoming changes

A proactive and well-prepared approach builds trust and speeds up the valuation process.

Final Thought: Good Financials = Strong Valuation Foundation

Strong financial records are more than just paperwork—they’re a signal of a well-run business. Clean, consistent, and transparent financials can not only improve your valuation result but also position you better for investor interest, buyer confidence, or strategic planning.

At Andersen in New Zealand, we work with business owners across industries to get their financials valuation-ready. Whether you're preparing for a transaction, succession, or simply want a clearer picture of your business’s worth, our team can help.

Author - Aaron Wallace