What will a buyer check first in your books?
A buyer will not pay full price for profit he has to take your word for. Buyers want tax returns from the last three years and books for the current year through last month. If it is not in the records, he will price the business as if it is not there. That is why three years of returns that match your books matter more than a good story about the business. The match is the proof. It shows the revenue is real and the costs are real, and it gives him something solid to work from. That is how we look at it too. We start with your tax returns and work out what cash flow they actually prove. Most of getting ready is closing the gap between what you know the business makes and what the paperwork shows.
How do you make your books match your tax returns?
Pull the last three years of returns. Put each one next to that same year in your books. Check revenue first and profit second. If the two do not match, a buyer will go with the lower number. He has no reason to do anything else.
Small gaps are normal. Timing by itself can push income into a different year. What matters is whether you can explain each gap in a sentence or two.
Most of the time it comes down to something like this:
- Income hit the books in a different month than it hit the return
- A one-off cost that only shows up in one year
- Depreciation handled one way in the books and another way on the return
If you cannot explain a gap, it will cost you. A buyer reads an unexplained difference as risk and protects himself the only way he can. He lowers the price or he walks. Write the explanation down now, while you still remember why the number moved. You will not remember it three years from now.
Take our free five-minute assessment to get an estimate of what your business could sell for.
What's My Business Worth?How do you remove personal spending from your business books?
A lot of owners run personal costs through the business. It builds up over years and nobody thinks much about it until it is time to sell. That is when it costs real money. It usually shows up in places like these:
- A personal vehicle paid out of the business account
- Phones for family members who do not work in the business
- Personal travel folded into a business trip
- Household bills put on a business card
Every dollar of that sits in your expenses and pulls down the profit your books can show. A buyer prices the business off that lower figure because it is the only one he can prove. The result is a business that looks smaller on paper than it is in real life. Start fixing it well before you sell. Pay personal costs from a personal account and keep the business cards for business use only. Talk to your own CPA about how to make the switch. This is general information, not tax advice for your situation.
How often should you close your books?
Pick one day each month and close the month before it. It does not need to take long. It does need to happen on schedule.
- Reconcile each bank account
- Reconcile each business card
- Enter every bill that has come in
- Send every invoice customers still owe
- Save the profit and loss statement for that month
File each statement where you can pull it up in a minute. A short habit each month beats a long catch-up project later, and it catches mistakes while they are still small. By the time you talk to a buyer you will have a clean run of monthly statements to hand over. A statement that is three months out of date tells a buyer nobody is watching the numbers. A current one says the opposite without you having to argue the point.
Which owner costs should you track as add-backs?
Some owner costs get added back when a buyer works out cash flow. That only happens if the cost is clear and you can document it. Memory does not count as documentation. Keep one running list, in a notebook or a simple file, and give each entry four things.
- The date of the cost
- What the cost was
- The amount
- The receipt or statement that backs it up
Add to it when you close the books each month. Five minutes is enough. The list keeps a clean line between personal spending and business spending. It also gives a buyer proof instead of a story you put together from memory at the last minute. Buyers trust the list that was built over time. They discount the one built the week before a sale.
What loose ends will a buyer look for?
Buyers look hard at the loose ends because that is where surprises hide. Start with receivables. Collect what customers still owe you and write off the balances that will never get paid. A list full of dead balances makes every other number look soft. Count your inventory next. Write down what you actually have on hand and put a date on the count. Do not carry an old count forward from last year.
Put your debt on one page too.
- Each loan balance and its monthly payment
- Each lease and when it ends
- Any tax balance you still owe
A buyer should get the full picture from that one page. Surprises on debt end deals. Cleaning this up will not raise your price by itself. What it does is stop small doubts from turning into a lower offer.
Clean records make the next step simpler when you sell your business.
FAQ
Short answers to the questions owners ask about getting their books ready for a buyer.
Three years. That is what most buyers ask for, plus your books for the current year through last month. It lets them see the trend in the business over time.
Yes, you can. Just know the price will follow what you can prove, not what you tell them. A few months spent cleaning things up first usually pays for itself in the offer.
Often, yes. For a lot of owners it is the cheapest way to get a better price. A good bookkeeper can straighten out the past years and then keep you current each month, which is what buyers want to see.
Yes. Send us your returns and we will walk through them with you. We will tell you what price they support and show our work. We look for businesses where the returns prove $300K or more in cash flow.