A buyer writing on Searchfunder about his first months after closing put it simply. The acquisition cleanup was the work nobody wanted to touch. The seller's accountant was retiring. Nobody inside the company had done it. He brought in a firm after about six weeks, and when a second accountant reviewed the work, they found holes.
His advice was to line up an accountant who knows acquisition accounting before closing. That advice is right, and it helps to know what they will need.
Why a stock purchase leaves work in the books
In an asset purchase, the buyer's company buys the assets and starts fresh books. In a stock purchase, the buyer buys the shares of the existing company, and the company carries on as the same legal entity with the same books. Everything that moved through the company at closing has to be recorded in them.
Start from the funds flow statement
The funds flow statement, sometimes called the closing statement, lists every payment made at closing: who paid it, who received it and from which account. It is the source document for the entries.
Go through it line by line. For each payment, decide whether it belongs in the company's books, the buyer's holding company, or neither.
What typically needs recording
Debt paid off. Seller loans, lines of credit and equipment loans paid off at closing reduce liabilities in the company's books. Get payoff letters so the amounts and interest to the date are exact.
Transaction costs. Legal, accounting, lender and broker fees. Some are the buyer's, some the seller's, some the company's. Each needs to land with the right party, and the tax treatment differs, so your CPA should confirm how they are recorded.
Payouts at closing. Bonuses to employees, payments to the seller and settlements of amounts owed to them. These often run through the company and need recording as expenses or settlements of liabilities.
The new financing. If the company borrowed directly, the loan, its fees and the first interest go in its books. If a holding company borrowed, the loan sits there, and the company usually pays the holding company to service it.
Holding company balances. Money moving between the holding company and the operating company should be recorded on both sides as intercompany amounts, with a written agreement behind them.
Amounts the buyer and seller paid for each other. In the weeks around closing, the buyer often pays things that were the seller's and the reverse. List them, then settle them, usually through the working capital true-up.
Cut off at the closing date
Treat the closing date as a period end. Close the books to that date, so everything before belongs to the seller's period and everything after to the buyer's. This is also what the working capital true-up is calculated from, so the two pieces of work should be done together.
The accounting election to ask about
Whether the buyer's purchase price is reflected in the company's own books, rather than only in the buyer's, is an accounting policy choice for private companies. It affects what the balance sheet shows and can matter to lenders. Your CPA should decide it early, before the first set of post-closing statements goes to the bank.
What clean entries will not settle
They will not settle the tax treatment of the deal. How the purchase is treated for tax, and what that means for the company's returns, belongs with your CPA. The entries only record what happened.
They also will not cover the seller's final tax filings. Those normally remain the seller's responsibility under the purchase agreement.
Frequently asked questions
Does the company keep its books after a stock purchase?
Yes. In a stock purchase the company remains the same legal entity, so its existing books continue and the closing transactions are recorded in them.
What should be recorded in the books after an acquisition?
Debt paid off at closing, transaction costs that belong to the company, payouts to employees or the seller, any new loan borrowed by the company, amounts owed to or from the buyer's holding company, and the cut-off at the closing date.
What is a funds flow statement in an acquisition?
A document listing every payment made at closing, including payoffs, fees, payouts and loan proceeds, with the payer, payee and amount. It is the main source for recording the deal in the books.
Who should record an acquisition in the books?
An accountant experienced in acquisitions, ideally arranged before closing and given the closing documents as soon as the deal completes. The same person should prepare the working capital true-up, because the two depend on each other.
Where CFOLogic fits
We take the closing documents, close the books to the closing date, record the funds flow line by line and keep the holding company and operating company balances reconciled. We work alongside your CPA on the tax treatment and the accounting election, and hand them a file they can review rather than rebuild.