Almost every conversation I have with a business owner ahead of a sale starts the same way. The books are clean, the business is straightforward and there are no financial surprises. There almost always are. Not because of anything dishonest but because most owner-managed businesses build their accounting function for operations, not transactions.
The seven habits that create problems at sale
Revenue that doesn't convert to cash — revenue growing faster than operating cash flow, or positive profit alongside a tight bank account, signals a quality of earnings issue. Buyers will reconstruct revenue recognition if they have doubts. Adjustments are almost always downward.
Management accounts without a consistent story — buyers read your accounts cold. Inconsistent formats, cost categories that have moved between periods and one-off items not clearly labelled read as unreliability.
Accounts managed for tax efficiency rather than commercial clarity — the normalisation exercise becomes complicated. A number needing extensive adjustment to be credible attracts scepticism.
Accruals accounting applied inconsistently — costs recorded when invoices arrive rather than when incurred. The tell-tale signs: balance sheet accounts that barely move, and P&L lines that spike when large invoices happen to arrive.
Bonuses and commissions on a cash basis — under UK GAAP the obligation arises when performance occurs, not when the cheque is written. P&L lines spiking at year-end reduce confidence in the broader financials.
No allowance for doubtful debts — a business with no bad debt provision implicitly assumes 100% collection. This overstates both assets and profit and signals that basic credit management may not be in place.
Stock and WIP not properly valued — buyers will put their own eyes on this. Differences between what they find and what the balance sheet says come off the purchase price.
What to do about them
All of these are fixable. But fixing them takes time. It’s not just to restate the numbers but to establish a track record of cleaner accounting a buyer can observe across multiple periods. Start early before going to market.
Identify issues early — through a pre-sale financial review that looks at the accounts through a buyer's eyes
Prioritise revenue, gross margin and cash flow — the lines that drive valuation and attract most scrutiny
Clean up policies and processes, not just outputs — buyers look at how numbers were produced, not just what they say