Every owner who sells a business goes through diligence, the buyer’s close look at the history behind the numbers. The questions are usually ordinary: where does this revenue come from, why did this margin change, what is this liability? Books that answer those questions quickly keep attention on the business itself. Books that cannot answer them tend to become part of the negotiation.
What buyers test
Buyers and their accountants commonly test whether reported earnings are real and repeatable. They tie revenue to bank deposits, test receivables and inventory, look for liabilities that were never recorded, and adjust earnings for items they consider unusual. The adjusted figure often becomes the basis for price.
Many deals also set a target level of working capital, meaning the receivables, inventory and payables the business needs to operate, and adjust the price at closing if the actual level differs. Reliable monthly balances make that target easier to agree on and easier to meet.
Three items that often need explaining
Customer deposits: in accrual-basis financial statements, cash received before the work is done is a liability until it is earned, so recording deposits as revenue overstates earnings in a growing business. Tax rules for advance payments follow their own timing. Owner compensation: buyers commonly restate the owner’s salary and benefits to what a replacement manager would cost, so owner payments should be clearly recorded. One-time items: a lawsuit, a major repair or a move can be legitimate adjustments, as long as the original documents show what happened.
Start with ordinary closes
The best preparation is an ordinary monthly close done consistently: cash, cards, debt, payroll, receivables, payables, inventory and deposits reconciled to support, with explanations kept beside the numbers. A business that closes this way for a year or two before a sale already has most of its diligence file. Filed returns, payroll and sales tax filings, and any notices belong in the same order, because buyers commonly ask for them.
The structure of the sale matters here too. In a sale of stock, the buyer inherits the company’s tax history, so open questions in past returns become the buyer’s concern and, often, a point in the negotiation.
- Operating recordsLedger detail, reconciliations, aging, payroll, inventory and unusual activity.Company finance team
- Tax recordsFiled returns, schedules, elections, notices and payment records.Tax advisor
- Legal and ownership recordsFormation documents, agreements, ownership schedules and contracts.Company counsel
- Valuation and transaction analysisValuation, purchase-price analysis, financing and deal advice.Valuation, banking and lending professionals
Where we help
We keep the books and tax filings in a form a buyer can follow, and we show how the structure of a sale affects the tax the owners will pay. The price itself is a commercial question for the buyer, the owner and their valuation and banking advisors; clean books let that conversation start from agreed facts.
Sources
Start a year ahead if you can.
Tell us when you might sell and how the books are kept today. We can talk through what a buyer is likely to ask and how to prepare.
Contact our team