Our internal financials are managed on a modified cash basis, but the buyer's Quality of Earnings firm is auditing us under GAAP and ASC 606 revenue recognition. How do we transition our accounting records to prevent a massive post-LOI downward adjustment to our historical EBITDA?

Question

Tyler Smith · Accepted Answer

Modified cash financials will sink a professional Quality of Earnings review. A buy-side accounting firm will systematically convert your books to GAAP to search for unrecorded liabilities and mismatching revenue. If you recognize revenue when cash hits your bank account rather than when the service is delivered, your historical EBITDA will fluctuate wildly. This volatility gives the buyer a perfect excuse to claim your business is unpredictable and demand a price adjustment.

To fix this, you must run a sell-side analysis before you ever sign an LOI. Have your leadership team use your weekly Level 10 Meeting™ to assign a Rock focused on converting your last two years of financials to accrual accounting under GAAP standards. Pay close attention to how you track deferred revenue and prepaid expenses.

By proactively converting your books, you control the narrative. You can present a clean, adjusted EBITDA baseline that matches the reality of your operational delivery. When the buy-side analysts run their models, they will find a tight, predictable financial engine rather than a messy cash-basis ledger. This level of preparation protects your enterprise value and prevents the typical post-LOI price chipping that owners face when their books are sloppy.