So I'm getting ready to list my HVAC company in about 18 months. My broker keeps harping on SDE this and SDE that, but honestly my books are a mess. Personal trips on the business card, cash jobs that never hit QuickBooks, tools bought under my brother's name. How much does this actually matter for the SDE number buyers see? Can't we just 'normalize' everything at the end?
SDE
Why clean bookkeeping makes your SDE calculation bulletproof
Short answer: yes it matters. A lot. Buyers don't trust 'trust me, it's really more.' They trust the P&L. Messy books mean every add-back gets questioned And your SDE gets discounted.
SDE is only as good as the paper underneath it. Clean books = shorter diligence, fewer re-trades, better multiple. That's the whole game.
lol at 'normalize at the end.' That's what everyone says until the buyer's accountant finds $40k of personal expenses and decides your add-backs are fiction. Fix it now, not at LOI.
I sold a plumbing outfit two years back. My CPA spent about five months cleaning up two years of books before we listed. Cost me maybe $8k. We got three offers over ask. My buddy sold his with 'normalized at the end' books and took a 20% hairut after diligence. Do the math. Clean books are cheap relative to what a re-trade costs you.
Also—and nobody says this enough—clean books protect YOU. If your SDE is defensible with receipts and a real P&L, you don't spend three weeks fighting a buyer who wants to claw back every nickel. Less stress, faster close.
What counts as 'clean' though? I do my own books in QuickBooks and they balance. Is that enough or do I need a real accountant?
Balancing isn't the same as clean. Clean means: every transaction categorized, personal stuff segregated, owner comp clear, one-off expenses flagged, and a paper trail for each add-back. A buyer's CPA will reconstruct your SDE from your GL. If they can't, they'll assume the worst.
Also the cash jobs thing OP mentioned. That's the killer. Unreported revenue doesn't boost SDE, it just makes your reported revenue look smaller than reality, which tanks your multiple. You can't add back revenue you never booked.
This. Buyers pay a multiple of SDE, but they underwrite risk based on revenue quality. Underreported revenue = higher risk = lower multiple. Clean books show the real top line.
Genuinely didn't realize cash jobs could hurt the the sale. I thought that was just a tax thing. This thread is making me nervous about my own landscaping business.
It's both. Tax thing AND valuation thing. Sucks, but that's the deal.
One more: get a separate business account and stop mixing personal. OP, that alone will save you a month of cleanup. Your brother's tools situation is weirder but fixable with a bill of sale and a note in the file.
Alright, the cash thing is what I was worried about. I've got probably 400+ transactions over two years with no real categorization. Is it worth paying someone to rebuild it or should I just start clean from January and let the old years be what they are?
Start clean, AND rebuild the old years. Buyers will want 2-3 years of financials. If year one is a disaster, they'll either pass or discount hard. Rebuild it. Annoying but it's the price of a clean exit.
Or just wait and sell in 3 years with 3 clean years of books. Depends how fast you want out.