Our historical bookkeeping is accurate enough for tax filing, but we still use cash-basis accounting and have several intercompany transfers that muddy our profitability. How do we clean up our financial reporting on our two-year exit runway to prevent buyers from discount-pricing our business?

Question

Tyler Smith · Accepted Answer

Clean financial reporting is the ultimate driver of transaction trust. If a buyer cannot easily trace cash through your business, they will assume the worst and slash your valuation. Tax avoidance strategies and cash-basis accounting are fine for running a closely held private company, but they are toxic to a professional M&A process.

Your first step on the two-year runway is to transition to accrual-basis accounting conforming to generally accepted accounting principles. This is your lead domino. By converting to accrual, you align your revenue with the actual delivery of services, which instantly gives buyers a clear view of your operating margins.

Next, untangle and eliminate all intercompany transfers and non-operational entities. If you run multiple businesses, use the EOS leadership skill of simplification to separate their financials completely. Your target entity must stand alone on its own balance sheet and income statement.

Make prediction a core discipline. Use your weekly Scorecard to tie operational activities directly to your monthly financial performance. When you can consistently predict your monthly revenue within a tiny margin of error, you prove to the buyer that your business is highly manageable and that your numbers are bulletproof. This level of transparency prevents buyers from chipping away at your enterprise value during due diligence.