The Brief
Messy financials aren’t a paperwork problem — they’re a credibility crisis.
If the books are a Frankenstein Excel file with missing months, broken formulas, and numbers that don’t tie to the bank, you don’t have a deal. You have a story.
Bad bookkeeping is one of the fastest ways a deal collapses in due diligence.
If you can’t verify SDE, reconcile cash flow, or match financial statements to reality, lenders won’t fund the deal — and you’ll inherit someone else’s chaos.
The biggest red flags are:
- Gaps in the trail — missing months, silent P&Ls, or “lost” records.
- Numbers that don’t match — revenue claims that don’t tie to bank deposits or tax returns.
- Excuses instead of data — “trust me” is not due diligence.
- No reconciliation — which means no financing and no trust.
If the numbers don’t add up, neither will the deal.
The Frankenstein File Dump
You ask for clean financials.
They hand you:
- A 12-sheet Excel file with no formulas
- Tabs named “FINAL_V2_REAL” and “ACTUAL_FINAL_FINAL”
- Half the months missing
- Revenue that jumps around like a toddler on espresso
Example:
A landscaping company claims $800K revenue. But their “books” are a random Excel sheet with totals that don’t tie to the tax return or bank deposits. Every time you ask about a gap, the owner says, “Oh, that’s just how we do it.”
Why it matters:
If the books are chaotic, the business usually is too. This isn’t about spreadsheets — it’s about operational control. No clean numbers means:
- You can’t verify SDE.
- You can’t get financing.
- You can’t trust a damn thing.
Your move:
If you can’t reconcile it, either walk or slash the price to match the risk.
Gaps in the Story = Gaps in the Cash
Legit businesses leave paper trails.
Bad ones leave excuses.
- Missing bank statements
- Unfiled tax returns
- “We lost access to QuickBooks” (a classic)
- “The accountant left” (translation: chaos)
Example:
A spa claims $500K revenue, but there’s a six-month hole in the records. The seller shrugs and says they “changed systems.” A bank won’t touch that deal — and neither should you, at full price.
Your move:
If the financials don’t cover at least 2–3 years consistently, it’s not “missing data.” It’s a black hole. Price accordingly or move on.
Numbers That Don’t Match Reality
You don’t need to be a CPA to catch this one.
Just cross-check the claimed numbers with bank deposits.
Example:
- Claimed revenue: $1.2M
- Bank deposits: $800K
- Tax return: $750K
That $400K gap isn’t a rounding error — it’s either unreported cash, sloppy accounting, or outright fiction.
Why it matters:
If the seller can’t tie revenue to bank statements, lenders won’t finance the deal. And you’ll spend the first six months of ownership cleaning up someone else’s mess.
Your move: Always reconcile claimed revenue with hard numbers. If the story doesn’t match the math, trust the math.
Owner Explanations That Smell Like BS
When the books are bad, the excuses are worse:
- “It’s all in my head.”
- “The accountant quit.”
- “We just use cash.”
- “Don’t worry, it all works out.”
Example:
A car wash owner can’t produce a P&L. Says he “knows the numbers by heart.”
You ask for statements. He prints out receipts from a gas station POS system.
No, really.
If someone can’t show you clean books for a $1M deal, you’re not buying a business — you’re buying a story.
Your move: Document every gap. If they can’t fix it fast, you either walk or price it like a salvage car.
When to Walk — and When to Use It as Leverage
Not every messy book is a deal killer.
Some are just a discount gift wrapped in chaos.
Example:
A solid local HVAC company with great customers has messy books because the owner never upgraded their system. But revenue ties out to deposits, and tax filings are consistent. That’s not a killer — that’s negotiating leverage.
But if:
- Records don’t reconcile
- Statements are missing
- Explanations are smoke
→ Walk.
Your move: If it’s fixable and verified, use the mess to lower price or structure a holdback. If it’s fiction, bail.
Bottom Line: Messy Books = Messy Business
Financial statements aren’t a formality.
They’re the backbone of the deal. If you can’t trust the books, you can’t trust the business.
- Missing data is never “normal.”
- Frankenstein spreadsheets are red sirens.
- No reconciliation = no trust.
Disclaimer
This article is for informational purposes only and does not constitute financial, legal, or investment advice. Always consult with a qualified professional before making any acquisition decisions.
Avery Hastings, CPA
Avery Hastings, CPA lives in Tokyo, helping first-time buyers cut through the noise and avoid bad deals. When she's not tearing apart small biz P&Ls, you’ll find her sipping a Pauillac red or carving through powder on her snowboard in the Japanese Alps.