Preparing the books
for a business sale

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.

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.