- Heather Kephart
- Aug 11
- 5 min read
The deal has been negotiated, the approvals have been granted, and the wire instructions have been prepared. Behind the scenes, frantic small business bookkeepers and accountants are scrambling for reports and schedules they've never prepared, or worse, that they've never heard of. For years, these trusted partners have faithfully recorded receipts and made timely payments; but now the client needs more. A sophisticated buyer, an impatient deal team, and expensive attorneys are standing by...waiting.
The sale of a company is a massive milestone for a business owner, perhaps a first and only experience. For acquirors, it's another deal, with ROIs and KPIs hovering on the other side of closing. For accountants and bookkeepers, it's an opportunity to provide value when it matters most. Regardless of whether clients are considering an ownership transition, accounting teams should never be caught flatfooted in these 4 areas:
Backlog Reporting
Most business owners have a pretty good, if not precise, idea of work coming in the door - only in their head. Backlog here, defined as contracted work and known recurring revenue, is of top-shelf interest to buyers and investors. Backlog is the foundation of forecasting, which ultimately supports the valuation of the company. Accountants should also know this number because it can be calculated; and the number should be in a workbook and updated regularly.
Most accountants and bookkeepers likely do not have backlog reporting ready because it's forward looking, and priority for monthly close is what has already happened. It's understandable, but it's a mistake as a trusted advisor and a miss at deal time. Backlog is a leading indicator of cash flow, and cash flow is the number one concern of most business owners. And in the heat of a deal, someone has to prepare it; if not the accountant, then the business owner, on top of everything else on their plate. With a little more time with the business owner each month and a few more minutes studying their new wins and contracts, this basic deliverable turns to gold whether or not a third party is involved.
Normalized Earnings
Most business owners are rightfully consumed with running the business and never give a second thought to how a third party might view the financials. Normalized earnings, however, are often the first data point digested by interested parties and often prepared for the first time by investment bankers or an outside firm. Formalized reporting on normalized earnings is called a Quality of Earnings (QoE) report and is now required by buyers in most transactions. It makes sense that accountants and bookkeepers don't provide consistent reporting on a number that business owners aren't asking for; there's also tremendous value in the accounting team thinking far ahead of a possible transaction.
Normalized earnings reflect historical financial statements adjusted for any non-recurring items, expenses that wouldn't continue under new ownership, accounting corrections or re-allocations to the proper period, and any other adjustments to remove anomalies. It's never too soon for a business owner to be aware of these adjustments because it can fundamentally change the perception of a business. If the accountant or bookkeeper is keeping track of adjustments along the way, it could save a lot of time; and if done professionally, could result in foregoing a QoE, e.g. cost savings for the business owner.
Net Working Capital (NWC)
Net working capital is by far one of the most confusing topics for business owners when negotiating the sale of their business. Unfortunately, it's also not well understood by most accountants and bookkeepers who have not experienced the topic in the context of a transaction. NWC is such a hot topic, another article is on the way that will attempt to answer the the most common questions asked by business owners about NWC - stay tuned!
All business owners understand well that the business needs more liquid assets than upcoming liabilities to avoid having to borrow money. Without the help of an experienced accounting advisor, they can lose sight of how much working capital is actually needed to run the business. This can lead to several issues including 1) an uninformed negotiation regarding how much working capital stays in the business at close, and 2) missed opportunities for investing excess working capital in or outside the business. In a purchase / sale agreement, the buyer and seller agree on a NWC target. Once the closing balance sheet is finalized, the amount over the NWC target is paid to the seller; and the amount under the NWC target is paid to the buyer, referred to as the NWC true-up. Because this can amount to significant cash changing hands, it's an imperative topic for accounting advisors to understand.
GAAP Closing Balance Sheet
Small business financial statements prepared strictly in accordance with Generally Accepted Accounting Principles (GAAP) is virtually nonexistent. Unless required by a bank or other third-party, there isn't a pressing need to incur the extra time and effort to make any necessary adjustments to be GAAP compliant - cash method or a cash/accrual hybrid method will usually suffice...until it doesn't. Even if non-GAAP financials are prepared for management, it's critical that accountants and bookkeepers know how to convert to GAAP at deal time.
Several key accounting aspects of a purchase / sale agreement are required to be prepared in accordance with GAAP, including the Closing Balance Sheet (or other financial statements that may be required depending on the type of transaction). The Closing Balance Sheet is a snapshot of assets, liabilities, and equity on the day of close and serves as the final cut-off between ownership and is usually prepared by the seller's accountants before closing. The buyer will then have a period of time to propose any post-close adjustments to the Closing Balance Sheet, including any GAAP clean-up. The adjustments can have a direct impact on the NWC true-up, which again, could mean cash going to the buyer from the business owner. Adjustments could also impact contract asset and liability accounts related to revenue recognition that could impact any earnouts tied to revenue or profitability.
In Summary
Backlog reporting, normalized earnings, net working capital, and GAAP financial statements are rarely topics that a business owner will want to or have time to learn. Even if business owner clients are far from selling or far from considering a transition, accountants and bookkeepers can be ready. Working these concepts into the monthly reporting and recurring conversations with business owners will not only introduce them to important topics should they eventually decide to transition, but it can add significant value along the way.
Contact Avail Business Advisors for accounting and advisory services that meet business owners where they are and always preparing them for what's next, or if you are an accounting services firm needing transaction support for your business clients: info@availbusinessadvisors.com.