The buy-side Quality of Earnings firm is proposing a massive negative adjustment to our historical EBITDA by forcing us to convert from cash to accrual accounting for the prior two years. How do we defend our historical earnings and manage this adjustment without ruining our valuation multiple?

Question

Tyler Smith · Accepted Answer

This cash to accrual adjustment is a classic buy-side tactic designed to claw back transaction value by exposing unrecognized liabilities or shifting revenue out of the trailing twelve-month window. If your business has historically operated on a cash basis, the key to defending your EBITDA is to perform your own pre-emptive quality of earnings analysis before going to market. Do not let the buyer be the first to model your accrual numbers.

To defend your historical earnings, you must build a clean, month-by-month reconciliation of your accounts receivable and accounts payable. Show that the cash collection cycle is highly predictable and that your working capital has remained stable. If the accrual conversion shifts revenue out of the target period, use your EOS V/TO to prove your forward-looking pipeline predictability, demonstrating that the revenue is not lost but merely timing-adjusted.

We recommend setting up a weekly Level 10 Meeting with your external CPA and fractional CFO to specifically address this quality of earnings reconciliation. Focus on documenting the exact timing of when services were delivered relative to when invoices were paid. By presenting a clean ledger that aligns with your operational metrics, you can show the buyer that the underlying cash-generating power of the business remains unchanged. This shifts the conversation back to your actual operating cash flow, which is the true driver of your valuation multiple.