Most buyers never open the seller’s QuickBooks file. They get a P&L, a balance sheet, and maybe a tax return, all printed out of the software by the seller or their bookkeeper, and they build the model from there.
The trouble is that a printed report only shows you the answer. The file shows you how the answer got made: who entered what, which invoices never got paid, which costs were never attached to a sale, and what changed after the numbers went out to you.
We spend a lot of our diligence time inside the file itself, and the same three problems come up again and again: revenue that never turned into cash, invoices counted twice, and cost of goods sold that was never recorded.
In most cases, these come from how the seller’s team entered transactions day to day, and reading a seller’s Quickbooks file is the only place you can see that.
Ask for Access to the File, Not a Stack of Exported Reports
The first request we make after the LOI is read-only access to the accounting file itself. A seller can invite an accountant user to QuickBooks without handing over their own login, and that one step changes what you can see.
Exported reports are a summary somebody chose to send. With access, you can run your own reports, change the date ranges, and drill into a single number to see every transaction behind it. You can also see the history behind the numbers, which a PDF never shows.
Sellers sometimes push back, and that’s rarely a red flag on its own. Explain that you won’t change anything and that it saves both sides weeks of back-and-forth. Once you’re in, start with the invoices nobody ever collected.
Phantom Revenue Hides in the Open Invoices Report
Phantom revenue is sales on the P&L that never became cash, and the open invoices report is where it sits. We’ve covered the most common cause, sellers who use the accounting file as a makeshift CRM, in our buy-side due diligence checklist. The question here is how you find it once you’re inside the file.
Run the open invoices report or the receivables aging detail and sort by age. A healthy business has a short list of recent invoices waiting on payment. A file with phantom revenue has a long tail of old invoices, often for round numbers, that nobody has chased in months because nobody ever expected to be paid.
Pick a handful of those old invoices and ask the seller about each one by name. Usually there’s a simple story: it was a quote, the customer went elsewhere, nobody closed it out. Every dollar in that tail was counted as revenue in the year it was created, so it has to come out of the earnings you’re paying a multiple on. Say a landscaping company’s aging report shows $90,000 of invoices over six months old, and most turn out to be quotes nobody accepted. At three times earnings, that’s $270,000 of purchase price sitting on sales that never happened.
Open invoices are the easier problem to spot. Duplicates take a little more digging, because the same job can be invoiced twice and only one of them paid.
How Do You Find Duplicate Invoices in QuickBooks?
Find duplicate invoices by running a sales report by customer, sorting by date, and looking for pairs: same customer, same week, similar amounts. When a seller logs an estimate as an invoice and then bills the real job separately, the pairs line up almost perfectly on the screen.
Then check whether either one was paid. If the seller collected on the job, one invoice should be closed against a deposit and the other should be sitting open indefinitely. That’s fixable. If both show as paid, that’s a real problem, because a payment was applied somewhere it shouldn’t have been and the overstatement won’t show up in receivables.
Duplicates aren’t only a revenue issue. On one client file we caught a roughly $37,000 entry recorded twice, once as a manual journal entry for a loan and once through the linked credit card account. Each entry looked fine on its own, which is why nobody had flagged it, and we only found it by going through the file line by line.
Once you trust the revenue, the next thing to check is whether the cost behind it ever made it into the books.
Missing COGS Shows Up as a Broken Ratio, Not a Missing Line
Missing COGS rarely shows up as an empty line. What you usually see is cost of goods sold that stops moving with sales, so the test is to run the P&L by month and put COGS next to revenue for every month in the period.
In a steady business, that relationship holds within a reasonable band. When one month breaks it, something in the recording process broke too. We had a client where July COGS came in around $40,000 against only $35,000 in parts sales. That’s clearly wrong, and when we dug in it wasn’t a software glitch or a sync failure. Staff had been picking a custom service line item instead of the proper inventory items, which rerouted sales to general labor and double-booked COGS at the same time. That one habit caused two problems at once.
The reverse matters just as much. A month where gross margin suddenly looks fantastic isn’t good news until you know why, and more often than not the cost never got recorded. If the seller kept reliable month-end inventory counts, you can also back into the real number. When inventory drops from $200,000 to $180,000, that’s $20,000 of COGS, full stop, whatever the invoices say. The monthly view tells you something is wrong, and the next section covers the list that tells you why.
The Products and Services List Shows Whether Cost Was Ever Possible
Export the products and services list and sort by cost. Every item the business sells with a cost of zero is an item where QuickBooks had nothing to pull into COGS when it was sold.
This is the check that explains a margin that looks too good. If staff can enter revenue without attaching a product or service, or attach one with no cost behind it, the sale lands on the P&L, and the cost never follows. On another business we took over after a sale, the fix meant exporting the full list, finding every zero-cost item, getting the operations team to fill in real costs, and reimporting it. The whole cleanup traced back to one missing field on every invoice.
In diligence, you don’t need to fix the list. You need to know how much of the revenue history sat on zero-cost items, because that tells you how far reported gross margin is from the real one. That gap flows straight into normalized earnings, the number our guide to quality of earnings is built around.
The Audit Log Shows What Changed After the Numbers Were Sent
QuickBooks keeps an audit log of who added, changed, or deleted each transaction and when. In diligence, it answers a simple question: did the numbers you were shown stay the numbers in the file?
Filter it to the weeks around when the seller sent you financials and to the year-end close. Deleted transactions deserve the most attention. On one home services file, invoices had started life as estimates and were later deleted, and the cost tied to them went with them. Rebuilding it took a two-level reconciliation, first by invoice and then by product and service, across two years side by side.
An unusual entry almost always has a story. We once flagged a roughly $10,000 reimbursement to a team member that turned out to be completely legitimate: she’d paid a vendor out of pocket, and it was billed through to the end client. The job is to find the story before you escalate.
Why Do Tax Adjustments in the Books Matter to a Buyer?
Tax adjustments in the books matter because they can change the numbers you’re relying on without anyone telling you. Many small businesses have an outside CPA who prepares the tax return and posts year-end entries directly into the file, and those entries are built for the return, not for the management picture you’re buying.
Run the journal report for manual entries and look at who made them and when. Large year-end entries from the outside preparer with no memo and no supporting schedule are worth a question. You want to know what each one was for and whether it belongs in the accrual books you’re using to price the deal.
This doesn’t stop at closing. One buyer found that the seller’s CPA had gone back into the file after close and pushed tax-related journal entries into the accrual books with no clear documentation, and nobody could tell whether the books were still accurate. Lock the closing date in the file, change the passwords, and remove outside users on day one.
When a QuickBooks Read Should Become a Full Engagement
Reading the file yourself gets you a long way on a simple business. If the target runs one bank account, sells a handful of services, and the reports reconcile cleanly, a careful buyer with access and a few evenings can find most of what’s above.
It gets harder fast when the file shows years of open invoices, a COGS line that doesn’t track sales, or manual entries nobody can explain. That’s when you want someone who reads these files every week, which is what our quality of earnings report is built for. If you’re earlier in the process, start with our overview of buying a business.
For what to do with the file once it’s yours, read our post on the first 100 days after closing, which covers cleaning up the chart of accounts the seller built.
If you have a target under LOI and want a second set of eyes on the seller’s QuickBooks, reach out to Ashford Sky and we’ll walk you through what we find in the file.
