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Selling Your Small Business: Winging It In QuickBooks

Posted on September 5th, 2020

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

As I tell prospective clients for our services, “QuickBooks has done a remarkable job of marketing its product as ‘easy to use’ — but that is also what makes QuickBooks easy to abuse.”  The truth is, QuickBooks will allow you to do just about anything you want, whether is it is correct from an accounting standpoint or not.  So you can be going along thinking everything is working just fine, when the reality is your financial statements are a total mess.  And your tax accountant is not going to clean all of this up at the end of the year either.  That’s too much work to do during tax season.  Instead, they’re going to extrapolate from QuickBooks only what they need for tax purposes, and instead rely more heavily on your reconciled bank statements.

As a QuickBooks ProAdvisor, we are often contacted to clean up a client’s QuickBooks file, and for the above reasons, their books are a total disaster.  Then one day the small business owner wishes to sell his business, and all of a sudden, the historical accuracy of his or her books has become urgent.

As a case in point, our firm was recently engaged by a small business owner’s CPA to clean up his books, as she had reached a point where she was no longer able to “work around” his massive mistakes.  Just about everything he was doing in QuickBooks was the wrong way to do things, and his financial statements and reports reflected this. Normally when we receive an engagement like this, our approach is to tie the client’s books to the CPA’s most recent tax return, usually the previous year, and then start the QuickBooks clean-up from there. In this case, however, after only a short period of time working on his books, the owner informed me that he had a prospective buyer for his business who needed certain information as soon as possible.  The information they requested, after their preliminary view of his file that he had sent them, is shown here in their Due Diligence List.

Since the inception of the business, this client had been using QuickBooks mainly to enter supplier invoices and record inventory purchases, and to create customer invoices to send to his customers for payment.  He knew nothing else about QuickBooks, leaving everything else to his CPA who, as described above, was mainly concerned with reconciling the bank accounts to prepare his tax return on a cash basis.  This ignores most of the accrual accounting information requested in the due diligence list.

Selling a small to medium-sized business is a complex venture, and many business owners are not aware of the the things prospective buyers look at.  So if you’re thinking about selling your business, the first step is to be able to provide accurate financial statements going back three or more years.  That is what will be needed to prepare an accurate business valuation to determine how much your business is worth.  And rest assured, potential buyers will scrutinize every aspect of your business.  Not being able to quickly produce financial statements, current, and prior years’ balance sheets, profit and loss statements, tax returns, equipment lists, product inventories, and property appraisals and lease agreements, may lead to loss of the sale.

Suffice it to say in this situation, the clean-up process suddenly turned in a whole new direction, the timing was critical, and much of it could not be recreated at this late stage.  Even if the sale goes through, you may not be able to get the price that the business would otherwise be worth if you had been able to produce an accurate financial history as requested by the buyer.  Thus, it’s important to maintain your books properly from the start, as someday you’re going to be asked to produce that information, whether it be to sell your business, or simply to obtain a bank loan.  And if you’re not comfortable with doing this yourself, then outsource it to someone who does have the expertise.

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