We run our business on cash-basis accounting to keep our taxes low. How early do we need to convert to accrual accounting under GAAP before taking our company to market, and what will buyers look for?

Question

Tyler Smith · Accepted Answer

Institutional buyers do not buy cash-basis books. They value your business based on future cash flows and standardized earnings before interest, taxes, depreciation, and amortization (EBITDA), which requires Generally Accepted Accounting Principles (GAAP) accrual accounting.

If you wait until you sign a letter of intent to restate your financials, you hand the buyer massive leverage. During the Quality of Earnings review, their forensic accountants will uncover mismatched revenue and expenses, unrecorded liabilities, and unpredictable margins. They will re-cut your trailing twelve months of EBITDA downward and discount your enterprise value dollar for dollar.

Begin your accrual conversion twenty-four to thirty-six months before going to market. This runway gives you at least two full calendar years of comparative accrual statements. Buyers look specifically for revenue recognition timing, properly accrued expenses, and accurate matching of direct job costs to the billing period.

Take these concrete steps right now:
- Retain a reputable third-party accounting firm to conduct a historical conversion and perform annual reviews of your financial statements.
- Shift your monthly close cadence inside your leadership team so the finance seat delivers accrual-based balance sheets and income statements within ten days of month-end.
- Stop treating your balance sheet as a tax-avoidance vehicle and start treating it as a transferrable product.

Clean accrual statements remove uncertainty. When buyers see predictable, audited monthly patterns, they submit cleaner offers and require significantly smaller escrow holdbacks.