How Bad Accounting Influences the Sale Price of Your Business
Published by
Brian Breneman
on
How Bad Accounting Influences the Sale Price of Your Business
For many business owners, a sale represents the culmination of decades of hard work. But when financial reporting falls short, it creates unwelcome opportunities for buyers to negotiate a lower sales price.
At Breneman Advisors, we help owners address these issues before they become deal-breakers. Let’s walk through how poor accounting undermines value and what you can do to avoid it.
Why Buyers Fixate on Your Financials
When a buyer evaluates your company, the financials serve as more than just a record of revenue and expenses. They are the diagnostic report of the business. If those records are inconsistent, disorganized, or unclear, buyers begin asking pointed questions:
“Can we trust these numbers?”
“Is this EBITDA real?”
“What risks are hiding beneath the surface?”
The result? More perceived risk, and a lower valuation. Buyers apply discounts to compensate, or they walk away entirely.
Even a solid business can be overshadowed by doubt. And in M&A, doubt gets priced in.
Common Accounting Red Flags That Kill Deals
Buyers have varying levels of risk tolerance, but some financial red flags will raise concerns across the board:
- Inconsistent financial statements; either across periods or between internal books and tax filings
- Blended personal and business expenses, which distort the company’s true cost structure
- Cash-based accounting with minimal documentation
- Unexplained variances or one-off adjustments without supporting detail
- Lack of GAAP compliance or accrual-based reporting in otherwise mature businesses
When these issues arise, buyers slow down. They demand more documentation. And often, they start revising offers downward.
How Bad Books Lower Business Value
The value of a business comes down to three things: Historical cash flows and the ability to prove it, the team, and opportunities for growth. If your financials are unreliable, buyers assume the worst. That uncertainty shows up in deal terms:
- Lower purchase price
- Contingent payments, such as earnouts or seller notes
- Lengthy diligence and legal review
The Hidden Costs of Disorganized Accounting
Poor books don’t just lower the offer. They also:
- Delay the sale process
- Increase third-party costs
- Sap momentum at a critical time
Deals fall apart in diligence more often than they should. In most cases, better preparation could have saved the transaction.
How to Get Your Financials Ready for Sale
If you’re planning to sell in the next 12 to 36 months, now is the time to prepare. Here’s where to begin:
- Clean up your general ledger: Reclassify expenses, separate personal items, and ensure your records align with tax filings.
- Switch to accrual-based accounting: This approach gives buyers a more accurate view of performance and timing.
- Fully document revenue and expenses: Eliminate informal or off-the-books tracking.
At Breneman Advisors, our Transaction Readiness services are designed to help owners identify and resolve these issues well in advance of a sale. That way, your business is positioned to command the value it deserves.
The Bottom Line: Clean Books, Stronger Deals
A strong business should never be undermined by sloppy accounting. Yet in our experience, financial disorganization is one of the most common, and avoidable, reasons deals fall apart or valuations suffer.
At Breneman Advisors, we work closely with Northern Michigan business owners to build clarity and confidence into the sale process. When your numbers tell a clean story, buyers are far more likely to pay accordingly.
Thinking about a sale? Let’s start the conversation.
Frequently Asked Questions — How Accounting Affects Business Valuation
1. How does poor accounting impact the sale price of a business?
Disorganized or unclear financial records create risk in the eyes of buyers. That risk often leads to reduced valuations, increased contingencies like earnouts or seller notes, or deals falling apart altogether.
2. What are the most common accounting red flags during due diligence?
Key red flags include inconsistent financial statements, cash-based accounting with little documentation, commingled personal and business expenses, unexplained variances, and a lack of GAAP or accrual-based reporting.
3. Can strong financial performance still result in a low offer if the books are messy?
Yes. Even a solid business can be undervalued if buyers can’t trust the numbers. In M&A, uncertainty gets priced in.
4. Why do buyers care so much about GAAP and accrual accounting?
Accrual-based, GAAP-aligned accounting offers a clearer, more accurate view of revenue and expense timing. It reduces uncertainty and helps buyers evaluate the business with confidence.
5. What’s the financial impact of messy books beyond valuation?
Poor accounting can delay the sale timeline, increase third-party advisory costs, and weaken deal momentum, any of which may jeopardize closing.
6. When should business owners start cleaning up their financials before a sale?
Ideally 12 to 36 months before going to market. This allows time to clean up the general ledger, switch to accrual accounting, and fully document financials before buyer scrutiny begins.