What is the best retirement plan for a self-employed contractor?

A solo 401(k) or SEP IRA may be worth considering when the owner has no eligible employees. The better option depends on income, desired contributions, administration, and whether employees may be hired.

Can an HVAC company offer a 401(k)?

Yes. An HVAC company may establish a 401(k) for eligible owners and employees. The plan must follow its documents and applicable contribution, testing, disclosure, and filing requirements.

Can a business owner contribute more than employees?

Possibly. Certain 401(k), profit-sharing, and cash balance plan designs may allow different contribution results, but applicable testing and plan rules must be satisfied.

Is a SIMPLE IRA better than a 401(k)?

A SIMPLE IRA may be easier and less expensive to administer. A 401(k) may provide greater flexibility and higher potential contribution opportunities. The better choice depends on the company.

Can a contracting business have both a 401(k) and a cash balance plan?

A business may be able to maintain both plans. This combination can create larger contribution opportunities, but it also increases cost, complexity, and funding responsibilities.

How to Clean Up Your Business Books Before a Sale: 8 Steps for Business Owners

Kendall Maccagnan

Sep 24

6 min read

By Kendall Maccagnan, CPA, CFP® and Financial Advisor in Tampa, Florida

If you are thinking about selling your business someday, one of the best places to start is not with a buyer, broker, or valuation. It is with your financial records.

A buyer wants to understand exactly what they are buying and have confidence in the numbers supporting the purchase price. When your books contain old receivables, assets that no longer exist, unclear ownership records, or loans between you and the company that have never been cleaned up, that confidence can erode quickly.

Clean financial records can also make due diligence easier and reduce the likelihood that accounting issues become negotiating points late in the transaction. Business owners should begin cleaning up their records well before a sale rather than waiting until a buyer is already reviewing the company.

Here are eight steps business owners can take to clean up their books before selling a business.

1. Separate Personal From Business Assets Before a Sale

Small businesses have a tendency to accumulate a little bit of everything over the years. Maybe there is a vehicle paid for by the business but titled personally. Perhaps furniture, artwork, equipment, or other personal property has made its way onto the company's books.

Before a sale, determine which assets actually belong to the business and which belong to you personally. It is best practice to document assets being used by the business and deciding whether they should be removed, contributed to the company, or otherwise properly accounted for.

Why does this matter? A buyer should be able to look at your balance sheet and understand what the company actually owns.

2. Decide Which Business Assets You Want to Keep

Not everything owned by the company necessarily needs to go with the sale.

You may want to keep a vehicle, computer, desk, artwork, awards, or something with sentimental value.

It is much easier to identify these items before negotiations begin. You do not want to discover during due diligence that the buyer assumed an asset was included when you intended to keep it.

3. Verify Ownership of Business Assets Before Buyer Due Diligence

A business can have an asset recorded on its books without legally owning it. For example, the company may have paid for a vehicle that was titled in the owner's personal name. Real estate, vehicles, or other titled property should be reviewed to make sure legal ownership matches the accounting records.

Checking deeds, titles, and registrations can help to confirm that assets are held in the correct name. Resolving those issues before a transaction can make the eventual due diligence process much smoother.

4. Clean Up Your Depreciation Schedule Before Selling Your Business

Your depreciation schedule should reflect assets the company actually still owns.

It is common for older businesses to have equipment, vehicles, computers, or other fixed assets sitting on the depreciation schedule years after they were sold, disposed of, or thrown away.

Leaving nonexistent assets on the books can create problems when the purchase price is allocated during a sale and may result in unnecessary depreciation recapture, particularly for pass-through businesses.

It can also undermine confidence. If a buyer finds several assets on your books that no longer exist, they may start questioning what else in the financial statements needs to be verified.

5. Clean Up Accounts Receivable Before a Business Sale

Take a close look at your accounts receivable aging. Are you carrying invoices from two, three, or four years ago that you realistically do not expect to collect?

Those balances can make your assets look stronger than they really are. Addressing stale receivables well before a sale can help avoid large write-offs close to the transaction and give buyers more confidence that the accounts receivable balance is collectible. Writing off years of uncollectible accounts immediately before going to market could create a large expense at exactly the wrong time and potentially hurt the financial results a buyer is evaluating.

If a receivable is not collectible, you generally do not want the first person questioning it to be your buyer.

6. Improve Your Financial Statements Before Selling Your Business

As a business becomes larger and moves closer to a potential sale, the quality of its financial reporting becomes increasingly important. You may want to consider preparing GAAP financial statements in the years leading up to an exit, including reviewed or audited financial statements where appropriate.

Greater confidence in the financial information may reduce the risk perceived by a buyer.

7. Organize Ownership Records and Corporate Minutes

A buyer needs to know that you actually own what you are selling. For corporations, that means reviewing the stock register and corporate minute book. For partnerships and LLCs, ownership documentation should similarly be accurate and complete.

Buyers and their auditors may review these records, so filling in missing minutes from prior years can help demonstrate that the business is organized and well documented. Getting ownership records organized in advance can prevent unnecessary questions during due diligence.

8. Review Owner Loans and Business Debt Before a Sale

Finally, review any money owed between you and your company. Does the company owe you money or do you owe the company money? Have shareholder loans accumulated over several years without clear documentation?

Evaluating these balances before a sale, including considering how owner debt will ultimately be handled as part of the transaction, can help prevent last-minute questions, unexpected tax issues, and confusion during due diligence. These balances can have tax and transaction implications, so they are worth reviewing with your accounting and tax professionals rather than leaving them unresolved until closing.

Why Do Clean Books Matter When Selling a Business?

Cleaning up your books is about making the financial picture clearer and easier to trust.

A buyer considering your business is ultimately trying to answer questions such as:

Are these earnings real?
Do these assets exist?
Can these receivables actually be collected?
Does the company own what the seller says it owns?
Are there accounting problems I am going to inherit?

The fewer unanswered questions a buyer encounters, the easier it may be for them to evaluate the business. For business owners in Tampa Bay and across Florida, this is also why preparing a business for sale should ideally begin years before the actual transaction. You have more opportunity to improve your financial reporting when you are not trying to clean up several years of records while simultaneously negotiating with a buyer.

The Bottom Line: Prepare Your Financial Records Before Selling Your Business

Preparing your books for a business sale is really about reducing uncertainty. Separate personal and business assets, determine what you want to keep, verify legal ownership, clean up the depreciation schedule and accounts receivable, improve financial reporting, organize ownership records, and resolve debt between you and the company.

These are relatively simple concepts, but waiting until due diligence begins can make them much harder to address.The best time to clean up your business financials is before you need a buyer to trust them.

Next Steps: If you are considering selling your business in the next several years, or simply want to understand how prepared your financial records would be for a future buyer, feel free to book a consultation.

Frequently Asked Questions About Preparing Your Business for a Sale

How far in advance should I clean up my books before selling my business?

Ideally, well before you begin negotiating with buyers. Issues such as stale receivables, inaccurate asset schedules, missing ownership records, and inconsistent financial reporting can be easier to address over several years than immediately before a sale.

What financial records will a buyer review when buying a business?

A buyer may review financial statements, accounts receivable, fixed assets and depreciation schedules, ownership records, corporate minutes, debt, and other documentation supporting the company's financial position.

Why does accounts receivable matter when selling a business?

Old or uncollectible receivables can overstate the value of an asset on your balance sheet. Large write offs shortly before a sale may also negatively affect the financial results a buyer is evaluating.

Do I need audited financial statements before selling my business?

Not necessarily. However, more formal financial reporting may give certain buyers greater confidence in the company's numbers. The appropriate level of financial reporting depends on the size, complexity, and circumstances of the business and potential transaction.

How can Tampa Bay business owners prepare financially for a future business sale?

Start by making sure the company's financial records accurately reflect what the business owns, owes, earns, and collects. Reviewing the books, tax strategy, ownership structure, and personal financial plan well before a potential sale can help identify issues while there is still time to address them.

This content is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. It is not intended as a solicitation or offer to provide advisory services in any jurisdiction where Off the Bay Wealth, LLC is not properly registered or otherwise permitted to operate. Information presented is based on sources believed to be reliable; however, accuracy and completeness are not guaranteed. This material is not intended to be a comprehensive analysis of all topics discussed. IRS provisions are subject to ongoing guidance and regulatory updates. Any financial decisions should be made in consideration of your individual circumstances, including your goals, risk tolerance, and time horizon. Investing involves risk, including the potential loss of principal.