Buying or selling a business: the books before and after closing

Two made-up deals show both sides. Every name and number here is invented.

Buying: Cinder Mesa Landscape buys another landscaping company

Cinder Mesa Landscape LLC is the landscaping company in our other worked examples. Elena Varga has owned it since 2019. In January 2026 it buys Sample Landscapes LLC, a smaller design, install and maintenance company, from its founder. Cinder Mesa buys the founder’s whole ownership in the LLC, and the price includes the yard, the building and the growing ground. The state contractor license is in the founder’s name, so he stays on as the license holder under a short consulting agreement until the license moves to Cinder Mesa.

Selling: one partner sells out to the other

Sample Fuel & Service LLC runs a fuel station with a convenience store and an auto repair and tire shop. Two partner companies own it. Partner Co. A owns 70% and sells it to Partner Co. B’s group. The group buys through Partner Co. B and through New Co. B2, a new company formed for the deal.

The seller note is on standby: the founder agreed to take no payments until March 1, 2027.

The same loan and seller note appear in our monthly CFO example for Cinder Mesa. In 2026, Cinder Mesa pays $11,200 a month in interest on the loan.

Buyer and seller agree on one split of the price. It sets the opening balance sheet, and it sets depreciation for years. The IRS groups assets into seven classes and puts goodwill last, so goodwill is whatever is left.

Before closing costs, Cinder Mesa’s total cost is $1,840,000: the $1,800,000 price plus $40,000 of work the business still owes customers who paid ahead.

Class II (securities) is empty on this deal.

Most small-business prices start from owner earnings: the yearly profit, plus the owner’s own pay and any one-time costs. The buyer then pays a multiple of that number. Real estate is usually priced on its own.

Here is how the founder and Cinder Mesa reached the price in the fall of 2025. These are example numbers for this made-up deal.

Every add-back needs proof. Here, the founder’s books recorded his $55,000 of owner draws as an expense, and his bank statements back up each one. A one-time cost, such as a legal bill, would need the invoice. A buyer’s lender checks each one.

Before closing, we found that the founder’s 2025 books included $40,000 of deposits booked as sales for work still ahead. The price used 2023 and 2024, so those deposits didn’t raise it. If it had used 2025, Cinder Mesa would have paid for sales that hadn’t happened yet.

At closing, the founder had collected $70,000 on six jobs that weren’t finished. $40,000 of it pays for work Cinder Mesa has to do after closing. That is money owed to customers in work, so it goes on the opening balance sheet as a debt.

The retaining wall job is 60% done but only half paid, so none of the money collected is for work still to come. Cinder Mesa bills the rest as the work is done.

The founder booked each customer deposit as a sale when the contract was signed. Sales jumped in the three months before closing, but the work was still ahead. After closing, Cinder Mesa books sales in the month the work is done. These are Sample Landscapes’ own sales.

The sales booked ahead of the work in those three months add up to $40,000, the same as the work still owed on the open jobs. The 2026 numbers stop at October 18, the same date our other worked examples use. These sales are part of Cinder Mesa’s $750,000 of sales for 2026 so far.

In the first week we list every promise in the agreement that we can check against the books and the bank.

Each promise that came up short is added to the true-up or taken off what Cinder Mesa still owes on the seller note. The attorneys settle them; the numbers come from us.

The missing truck and the $8,000 inventory shortfall come back to Cinder Mesa in the true-up, so the opening balance sheet keeps the price split both sides signed.

1. Week 0: Letter of intent signed.
2. Weeks 1–6: Due diligence: we read the deal against the books and send you the one-page summary.
3. Week 9: SBA loan approved by Arroyo Bench Bank.
4. Week 12: Closing, on January 2, 2026.
5. January–February 2026: Opening balance sheet, deposit list, inventory count and the true-up.
6. 2026: We settle what we found: the deposits booked early, the cash short for customer deposits, the unpaid supplier bills and the missing trucks.
7. Spring 2027: Each side files Form 8594 with its 2026 tax return, using the price split both sides agreed on.

Partner Co. A sells its 70% of Sample Fuel & Service LLC. Partner Co. B buys 10% and New Co. B2 buys 60%.

Loans the business has at closing

Partner Co. A’s share of these loans still matters for its taxes. See the tax questions below.

Before the final payment, we rebuild each partner’s capital account from the first year forward and get both sides to agree on it.

Year 6 runs to the sale date. Before the review, Partner Co. A’s capital is $444,000 and Partner Co. B’s is $216,000.

What the buyers’ accountant found with us before the final payment

After these fixes, Partner Co. A’s capital is $390,620 and Partner Co. B’s is $215,780. The first two items are business costs, so they lower both partners’ shares, 70% and 30%.

We count with the owners, then record the count in one entry. The books still carried $12,000 of inventory from an old purchase that no one could find. We write it off through profit and loss, so the loss still counts for taxes. We booked the $30,000 write-down before the sale date, so it is already inside Year 6’s share of profit in the capital table, which lowers both partners’ capital, 70% and 30%.

1. Month 0: Partner Co. A decides to sell. The partners agree on a price range.
2. Months 1–2: We line up the supplier, fuel brand and card accounts to move to the new owners at closing.
3. Month 3: Closing, mid-year. New Co. B2 signs its Lender A loan, and the business signs a separate Lender A loan that pays off the old bank loan.
4. Month 4: Capital review with the buyers’ accountant; open items settled.
5. Month 5: Final payment: the $100,000 held in escrow. The review’s fixes changed the capital accounts, not the price.

Most sellers sell to an outside buyer. The buyer’s accountant and lender will go through your books line by line. These are the items we prepare before a buyer sees anything.

• Close at least the last 12 to 24 months, with every bank and card account matched to its statement.
• List each add-back to profit, with the proof behind it.
• Book sales in the month the work is done. Cinder Mesa’s founder booked deposits as sales when customers signed, which made his last months look bigger than they were.
• Make a clean list of loans and customer deposits, with the lender statements and the open job list behind them.
• Count inventory and list equipment and trucks by tag, so the buyer finds what the agreement promises.
• Empty any catch-all account. A buyer’s accountant will ask about every dollar in it.
• Pull the last three tax returns, so the buyer can match them to the books.

Opening entry at closing (Cinder Mesa’s books)

The debit side shows what Cinder Mesa bought. The credit side shows how it paid: the loan, the seller note, the down payment and the deposits it now owes in work.

Closing costs

Loan fees go with the loan. Deal fees go with what was bought.

Jobs billed at signing: the reversal (the founder’s books before closing)

The founder booked customer deposits as sales when contracts were signed. The part for work after closing comes back out of sales.

Deposit used up as the work is done

In the spring of 2026, Cinder Mesa finishes $7,000 of the Backyard install.

Old bank loan paid off by Lender A (Sample Fuel & Service books)

Lender A pays off the old bank loan, and the business owes Lender A instead.

Partner buyout

Partner Co. A’s capital goes to zero. Its buyers take it over in the split they bought.

Inventory write-down

The count was $30,000 below the books. We book the difference to cost of sales, where it lowers profit and the tax bill.

If company cash pays part of a buyout, we help the partners agree in writing whose payment it was before we book it.

On a deal like these, we raise these questions early with you, the other side and your tax preparer. Each one is checked against IRS rules for your year.

• How is the price split, and do both sides agree? When a business is bought as a group of assets, buyer and seller each file Form 8594 with their return for the year of the sale, using the same seven classes.
• Did you buy the LLC or its assets? They can be taxed differently. When you buy the whole LLC from its only owner, as Cinder Mesa did, the IRS treats it as buying the assets, so both sides file Form 8594. When the seller keeps a small share, the business may be a partnership after closing, and we ask what that means for your filing.
• Does the partnership hold inventory or receivables? When a partner sells, the part of the gain that comes from inventory and unpaid invoices is ordinary income, not capital gain (section 751). The seller tells the partnership in writing within 30 days, and the partnership reports the sale on Form 8308 with its return.
• Does the buyer want a step-up? A section 754 election lets the buyer adjust the business’s asset values to what it paid. The partnership makes the election with a statement attached to its return for the year of the sale, filed by the due date, including extensions.
• How is the year split? When a partner sells mid-year, the partnership’s income for that year is split between seller and buyer by the time each owned the share.
• What about the loans? A partner’s share of the business’s loans counts in its basis, which is its tax cost in the partnership. When the seller is released from them, that relief counts as part of what it received.
• Do the K-1s match? The seller’s final K-1 should bring its capital account to zero, and the buyers’ K-1s should start from the right number. Capital accounts on the K-1 are reported using the numbers from the tax return.
• What gets deducted now and what over time? You can deduct up to $5,000 of startup costs in the first year. That $5,000 shrinks by each dollar your total startup costs go over $50,000. The rest is deducted over 180 months. Goodwill goes over 15 years.
• Is the seller note an installment sale? A seller paid over time can usually report the gain as payments come in on Form 6252. That doesn’t apply to inventory. The gain from depreciation taken in past years (called depreciation recapture) is taxed in the year of sale.
• How does the owner get paid now? The owner may be paid by wages, guaranteed payments (set amounts a partnership pays a partner for work) or draws. Which one depends on how the business is taxed after closing.