We are preparing for a sell-side Quality of Earnings review, but our accounting team still uses cash-basis or modified-accrual reporting for project milestones. How do we convert to GAAP-compliant accrual accounting to defend our actual working capital and avoid a massive post-close adjustment?

Question

Tyler Smith · Accepted Answer

When preparing for a sell-side Quality of Earnings review, presenting cash-basis or modified-accrual financials is a major liability. Buyers will use the lack of GAAP-compliant accrual accounting to claim your financial records are unreliable, which immediately invites a valuation haircut.

To defend your working capital and protect your valuation, you must proactively transition your financials before the QofE begins. Start by assigning a Rock to your finance seat on the Accountability Chart to complete an internal historical reconciliation. This means mapping your cash receipts to actual delivery dates, aligning your inventory cycles with cost of goods sold, and identifying true deferred revenue.

Use this data to create a bridge from cash to accrual accounting for the trailing twenty-four months. This bridge allows you to present a clean, normalized EBITDA that reflects actual operational performance rather than cash flow timing. By showing the buyer that your systems already track these accrual metrics, you eliminate their primary justification for demanding a massive working capital cushion.

Our recommendation is to engage a specialized CPA firm to perform a preliminary sell-side QofE. Finding and fixing accounting discrepancies internally allows you to control the narrative. When the buy-side team arrives, you present a clean ledger, proving your operational maturity and leaving them with no room to chip away at your purchase price.