The 6 Commandments of SMB Accounting
The state of a small business’ accounting is almost always a secondary concern to the owner until the time comes to sell. According to Patrick Dichter, the owner of Appletree Business Services, a Boston-based accounting firm that specializes in small businesses, many owners see accounting as a box to check. But for sellers who are seeking financing and need to complete due diligence, it’s much more than that.
Dichter told this year’s #BossUp conference that he’s seen several horror stories from searchers who’ve encountered messy accounting. In his joint presentation with Subhash Sharma, a managing partner of Bronte Bay accounting firm in Toronto, Dichter outlined some of the most common mistakes among buyers and sellers and offered some advice that, we’d suggest, you can think of as commandments for accounting.
Don’t buy a business from family without a purchase agreement (and don’t mix bank accounts)
It makes sense to want to operate on good faith when you’re purchasing a business from family, but things can get muddled very quickly if you don’t follow the necessary steps. In one case, Dichter recalled a client who was trying to buy a home services business from their uncle.
“They didn’t realize if it was a stock or an asset sale, and it became hard for them to understand how much they could pay themselves and how profitable the business was,” he said. Ultimately, the buyer failed to secure a line of credit from the bank because things were so messy. “Keep those things clean.”
Don’t use the seller’s accountant
“I’ve seen this go sideways so many times,” Dichter said. In one case, he recalled a client who was trying to buy a franchise and was especially committed to the deal. But when they went to secure financing, they found out that the seller hadn’t paid taxes in years.
“Part of the reason they couldn’t uncover that sooner was because they were planning on using the same accountant,” he said. There was a misalignment of incentives. You need an accountant whose primary objective is ensuring your needs are met rather than one who is trying to balance their obligations to the seller.
Don’t wait to consult a tax professional
“I see people wait six to nine months after buying a business before they consult a tax professional,” Dichter said. The longer you wait the messier the balance sheet can become. That can spell trouble come tax time when you’re trying to account for the depreciation of the business’ assets.
Proceed carefully with CRM and QBO Integrations'
Integrating your customer relationship management software with online accounting platforms like Quickbooks is convenient, but it has to be done carefully and with an eye for detail, ideally by a professional accountant. Dichter said that he saw someone try to integrate their CRM with Quickbooks online and, unbeknownst to them, their revenue was getting double booked.
“They thought the business was way up year-over-year and that was an error,” he said. “It was really bad news when we had to unwind that."
Don’t work with a bookkeeper who’s trying to catch up
Some accounting professionals can fall behind. Perhaps they’re about four or five months behind and they have every intention of getting back on track. But Dichter advised you avoid taking that risk when choosing an accountant.
“Books should be closed out within 30 days of the prior month, and if they’re months behind, that’s not something that’s likely to improve,” he said.
Don’t do your own accounting
Many SMB owners come from accounting or accounting-adjacent backgrounds. They’re financially literate and a lot of times capable of keeping their books in order. At least in theory. But Dichter advised owners not to do this, even if they can. “It’s not a good use of your time,” he said, and in his experience, because the attention of the owner is often divided amongst competing priorities, accounting can take a back seat. “They fall behind and things get messy.”
Dichter and Sharma covered several other key accounting considerations in their presentation, including the best corporate structure for different types of business, tax considerations, and questions related to timing (e.g. Q.: When is the best time to start speaking to an accountant if you’re looking to buy a business? A.: Once you’ve signed the Letter Of Intent.).
You can watch their presentation in full, here.
Opinions expressed here by contributors are their own.
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