A seller hands you three years of P&Ls showing steady growth and healthy margins. Those documents were produced by the seller, from a system the seller controlled, for the purpose of selling.
That does not make them dishonest. It does mean nothing in them should be believed until it ties to something the seller did not produce.
The tie-outs that matter
Revenue against bank deposits. The single most valuable test. Total deposits across all accounts, adjusted for loans, owner contributions, and transfers, should approximate reported revenue. A large unexplained gap in either direction is the thing to understand before anything else.
Payroll against the provider's filings. Payroll reported in the books should match what was actually filed. This is where undisclosed arrangements surface — people paid off the books, or contractors who look a lot like employees.
Loans against lender statements. Every liability confirmed with the lender, not the seller. Balance sheets routinely understate debt through nothing more sinister than payments expensed in full rather than split between interest and principal.
Sales tax collected against sales tax remitted. Frequently skipped and occasionally the largest single finding. Collected tax that was never remitted is a liability that can follow the business, and in many states responsible-person rules can reach individuals.
Where the profit figure usually moves
Almost every small business sale involves adjustments to reported profit. Some legitimately increase it, some quietly reduce it.
Personal expenses running through the business inflate costs and understate profit — genuinely addable back, and sellers are quick to point them out. Owner compensation is the mirror image: an owner paying themselves nothing produces a profit figure that assumes free labour. If you will need to hire someone to do that job, the real number is lower.
Then there are the ones sellers mention less. Deferred revenue with delivery still owed. Unused gift cards or class packs. Accrued but unpaid time off. Deposits held. Each is an obligation transferring with the business, and each is invisible on a P&L.
The three things that most often turn up
Revenue recognised on receipt rather than delivery. Prepayments booked as revenue make the trailing year look strong and leave you delivering work someone else was paid for.
Cost of goods sold shifting between years. Inventory that was expensed on purchase rather than on sale makes margin swing with buying patterns. Comparing three years of gross margin is the quickest way to see it.
A cash balance that has never matched the bank. Trivial to check, and it tells you how much care went into everything else.
Where the line sits
What we do here is bookkeeping analysis: reconstructing what the records actually show and where they do not tie to independent sources. That is a factual exercise, and it is usually the input the other advisers need.
What we do not do is issue an opinion on financial statements — that is reserved for licensed CPA firms, and if the deal size warrants a quality-of-earnings report you should get one. We also do not advise on price, deal structure, or the tax consequences of an asset versus stock purchase. Those belong with your CPA and your attorney.
After the close
Worth planning for: the books you inherit are usually the books that were being kept, not the books you want. Budget for a cleanup and a fresh chart of accounts in the first ninety days, so year one of your ownership starts from a foundation you established rather than one you inherited.
Behind on Your Books?
We handle your bookkeeping end-to-end — categorization, reconciliation, month-end close, and clean financial statements, so your books stay current and CPA-ready.