How to Prepare Records for a Sale or Audit

Organize financial records, documentation, and systems to survive buyer due diligence or regulatory audit scrutiny.

1. Reconcile three years of financial statements. Pull P&L, balance sheet, and cash flow statements for the last 36 months. Reconcile every account monthly — bank statements to cash accounts, receivables aging to A/R balance, inventory counts to book value. Flag and document any adjustments over 2% of revenue.
2. Organize supporting documentation by category. Create digital folders for contracts, invoices, receipts, payroll records, tax filings, and banking records. Every transaction over your materiality threshold needs backup documentation. For most small businesses, document everything over $500.
3. Document your accounting policies and controls. Write down how you recognize revenue, value inventory, depreciate assets, and handle accruals. Include who approves purchases, how you process invoices, and monthly close procedures. Auditors want to see consistent application of documented policies.
4. Clean up related-party transactions. Identify every transaction with owners, family members, or affiliated entities. Document the business purpose and market-rate pricing for each. Personal expenses run through the business must be reclassified or documented as distributions/compensation.
5. Prepare compliance documentation. Gather business licenses, permits, insurance policies, loan agreements, and regulatory filings. Include employment records showing proper classification of workers and tax withholding compliance. Missing compliance documents reduce business value and trigger audit flags.
6. Test your records with sampling. Pick 20 random transactions from each quarter and trace them from source documents through to financial statements. If you can't find clean documentation for 95% of the sample, your records aren't audit-ready.