How a Search Fund Operator Rebuilt an Acquired Company's Books in 60 Days

How a Search Fund Operator Rebuilt an Acquired Company's Books in 60 Days

The day after closing on the business, the operator opened the QuickBooks file and stared at a chart of accounts that put office supplies and freight in the same general ledger bucket.

This is a search fund accounting cleanup case study — an illustrative composite, not a real client file — that shows what changes when the new owner stops accepting the seller's books as the starting point and rebuilds them as a deliberate construction. The numbers are constructed for teaching. The pattern is one most ETA operators hit on day one.

The short version: a search-fund operator inherited a $9M distribution business with cash-basis books, no department-level reporting, and an SBA loan with covenant filings due in 90 days. The first 60 days were spent rebuilding the chart of accounts, converting to accrual, and setting up the reporting cadence that would make the next two years navigable. Product-line P&L showed one line was running negative margin. The decision to discontinue it lifted blended margin four points.

The cleanup wasn't optional. It was the moment the business started being run instead of inherited.

The setup behind this search fund accounting cleanup case study

Call the business HardyParts. A regional industrial distribution company, 18 years old, $9.2M trailing twelve-month revenue, sold to a search-fund operator in March via an SBA 7(a) loan covering most of the purchase price.

The seller had run the business as a sole proprietor's mindset wrapped inside an S-corp. The books reflected it: cash-basis, single revenue line, "supplies" account holding everything from packaging to office paper, owner reimbursements scattered across the P&L, no department or product-line tagging anywhere.

The seller's bookkeeper had been with the business for eleven years. She knew where everything was — which was exactly the problem.

The operator's first 90-day plan called for a monthly close by the end of June. That meant the chart of accounts, the basis conversion, the lender package, and a working management report all had to be in place in 60 days.

Why the books needed a rebuild, not a touch-up

A retouched chart of accounts inherits the seller's blind spots. The categories that hid what the seller didn't want to see — owner perks, related-party transactions, margin by product line — stay hidden under different account numbers.

The operator wasn't planning to hide anything. He needed to see things. Specifically:

• Margin by product line. The business sold four distinct product categories. The blended margin of 22% was the only number anyone could quote, and it didn't answer which category was actually carrying the business.
• Operating expenses by function. Sales, warehouse, administration, and delivery were all jumbled into "operating expenses" without separation. Decisions about headcount, vehicle fleet, and overhead couldn't be made off the existing reporting.
• Working capital indicators. Inventory was carried at year-end via a physical count adjustment. AR aging wasn't run. AP was mostly current but timing was a guess.

A rebuild meant designing the books for a different reader — someone who had to make growth and capital decisions, not just file a tax return.

What System Six did in the first 30 days

The engagement opened with a chart-of-accounts redesign, drafted in week one and reviewed with the operator before any data moved.

The new structure introduced:

• Revenue split across the four product lines, with a separate intercompany line for any pass-through.
• COGS by product line to match the revenue split, with a separate variance account for inventory adjustments.
• Operating expenses by function — sales, warehouse, fleet, administration — with a tag layer for location once the operator was ready to think about expansion.
• Owner activity in its own clean entity accounts so the post-close transition draws weren't mixed into operating expense.

In parallel, the team began the cash-to-accrual conversion. AR was reconstructed from invoice history and customer aging. AP was reconstructed from vendor statements. Inventory was counted, valued, and entered as opening balance against the closing balance sheet. Prepaids were identified and amortization schedules built. Deferred revenue (deposits on backorder items) was separated from current revenue.

By the end of day 30, the structure existed. The opening balance sheet on accrual basis was set. The next month's transactions could be coded into the new chart of accounts.

What changed in the next 30 days

April was the first full month closed under the new system. The team coded transactions live, ran the close on a deliberate calendar, and produced the first set of management reports by May 10.

The reports included:

• A product-line P&L, with each of the four lines presented separately and consolidated.
• A functional operating expense view by department.
• A current AR aging and AP aging.
• A working capital report (current assets less current liabilities, with the components visible).
• A debt service coverage ratio calculation for the SBA covenant.

The operator could now see the business in a way he hadn't been able to from the data he closed on.

The product line that was bleeding margin

The product-line P&L showed something the blended margin had been hiding.

Product Line C — a category accounting for 18% of revenue — was running at a gross margin of negative 4% once landed cost, freight, and the inventory carrying cost were correctly allocated. The seller had kept it on the catalog as a "loyalty product" for legacy customers, with informal pricing held below cost for a decade.

The operator ran the numbers two ways. Discontinuing the line would lose roughly $1.6M of annual revenue. It would also eliminate the gross-margin drag and free up warehouse space and freight capacity that could be redirected to the higher-margin product lines.

The decision was made on the data, not on legacy. Line C was discontinued, with a 90-day phase-out for the largest legacy customers and a transition plan to substitute products from Line A where the customer relationship was worth preserving.

The result over the next two quarters: blended gross margin rose from 22% to 26%. The four-point lift on the remaining $7.6M in revenue was more cash contribution than Line C had ever produced.

The SBA covenant the operator beat by a quarter

The SBA loan included quarterly financial reporting covenants: P&L, balance sheet, and debt service coverage ratio (DSCR) above 1.20x, due to the lender within 45 days of quarter-end.

The original setup — cash-basis QuickBooks, no DSCR calculation, no formatted package — would have made the first quarterly filing a fire drill at best, an extension request at worst.

With the rebuild done by end of May, the June 30 quarter-end produced its filing on time, with full accrual financial statements, a documented DSCR of 1.42x, and a covering memo explaining the product-line discontinuation and the margin lift it created.

The lender's response was a single email confirming receipt. That was the goal — an unremarkable filing that didn't generate a follow-up question.

What this search fund accounting cleanup case study shows

The first 60 days after an acquisition are the cheapest time to rebuild the books. The transactions are still small. The decisions about chart of accounts, basis, and reporting cadence haven't compounded into a year of bad data. The lender hasn't yet been let down.

A search-fund operator who inherits the seller's books inherits the seller's blind spots. A search-fund operator who rebuilds in 60 days inherits a business they can actually read — which is what they signed the SBA note to operate.

Find a CPA who has done the post-close rebuild before

If you're closing on an acquisition in the next quarter or you're 30 days past close and the books still feel like someone else's, the rebuild window is now. System Six works specifically with acquisition entrepreneurs and search-fund operators on the post-close chart-of-accounts rebuild, the cash-to-accrual conversion, and the lender reporting that makes the SBA covenants a non-event. Read their Sam's List reviews and book an intro call before the next acquisition closes.