If you’re in the process of acquiring a small business, or you’ve just closed on one, there’s a financial side of the transition that doesn’t get talked about nearly enough. Everyone focuses on the deal structure, the financing, the operational handoff. But what happens to the books? What state are they actually in, and what do you do with them once you’re the new owner?
This is an area I work in, and I want to give you a realistic picture of what to expect and what to prioritize.
Start With a Skeptical Eye on the Seller’s Books
Before you close on any acquisition, you need to understand that the financial records you’re reviewing during due diligence were maintained by the seller, for the seller. That doesn’t mean they’re fraudulent, but it does mean they reflect the seller’s priorities, habits, and accounting choices, not yours. Expenses may have been categorized inconsistently. Personal expenses may have been run through the business. Depreciation schedules might be missing or wrong. Revenue might be recorded on a cash basis when accrual would give you a more accurate picture.
Some of this is sloppy bookkeeping. Some of it is strategic. A seller who has been expensing their personal car, their cell phone, their home office, and a few other personal items through the business has been artificially depressing their reported profit, which they’ll present to you as “add-backs” to justify a higher valuation. Understanding how to read those add-backs, and whether they’re legitimate, is one of the most important skills in evaluating a deal.
During due diligence, you or your CPA should be scrutinizing at least three years of financial statements, bank statements, and tax returns. You’re looking for consistency, for red flags, and for the real underlying profitability of the business once the seller’s personal expenses are stripped out.
Set Up a Clean QBO File From Day One
Once you close, one of the first things you want to do is establish your own QuickBooks Online file for the business going forward. Don’t try to inherit and continue in the seller’s existing accounting file, especially if their books were inconsistent or messy. You want a clean starting point that reflects your ownership, your chart of accounts, your reporting preferences, and your financial beginning balance as the new owner.
Setting up QBO correctly from the start matters more than most new owners realize. Your chart of accounts is the backbone of your reporting, and if it’s set up poorly, you’ll end up with financial statements that are hard to read and harder to act on. You want categories that match how you think about your business, that make your margins visible, and that give you the information you need to make decisions month by month.
If you’re taking on the seller’s existing QBO file (sometimes it makes sense to do this for continuity, especially if the business has a long history in the system), you’ll want a thorough cleanup pass first, reviewing the chart of accounts, clearing out stale items, and making sure the opening balances are accurate as of your acquisition date.
Establish a Real Monthly Bookkeeping Process
A lot of the businesses being sold in the ETA space are small owner-operated companies where the previous owner was doing their own bookkeeping (or not really doing it at all and just handing a shoebox of receipts to their accountant every April). As the new owner, you need to build the financial infrastructure that the business probably never had.
That means monthly bookkeeping, every month, without fail. Transactions categorized. Accounts reconciled. A profit and loss statement and balance sheet in your hands within the first two weeks of the following month. This is how you run a business with visibility. This is how you catch problems early, spot trends, and make informed decisions about hiring, pricing, investment, and growth.
I’ve worked with clients who acquired businesses and didn’t establish a real bookkeeping process until six or nine months in, and every one of them told me they wished they’d started on day one. The first few months after an acquisition are hectic, but they’re also when you most need to know what’s actually happening financially in the business.
Know What Reports to Actually Review
Once your books are running cleanly, here’s what you should be looking at every month as a new owner:
Profit and Loss (P&L). This tells you your revenue, your expenses, and your net profit for the month. Compare it to the same month last year (if you have that data) and to your projections. Are you tracking toward the profitability the deal was underwritten on?
Balance Sheet. This tells you what the business owns, what it owes, and what the equity position looks like. Pay close attention to accounts receivable (are customers paying on time?) and any debt obligations tied to the acquisition.
Cash Flow. Profit on paper and cash in the bank are not the same thing, especially early in an acquisition when you may have debt service payments, transition costs, and timing differences between revenue and collections. Watch your cash position closely.
Get a Bookkeeper Who Understands the Transition
Post-acquisition bookkeeping is not the same as steady-state bookkeeping. The opening months involve things like recording the purchase price allocation, setting up any acquisition debt on the balance sheet, handling any earnout or seller financing arrangements, and making sure the transition of accounts and vendors is reflected correctly in the books. You want someone who has dealt with this before and knows what questions to ask.
If you’ve recently acquired a business and want to make sure the financial side is set up correctly from the start, I’d be glad to help. Book a free discovery call and let’s talk through where you are and what you need.
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