The buyer's Quality of Earnings firm is proposing a cash-to-accrual adjustment that shifts a large chunk of our historical revenue into the prior fiscal year, which lowers our trailing twelve-month EBITDA. How do we challenge this accounting methodology?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings firms love cash-to-accrual adjustments because they can use them to manipulate the timing of your revenue and slash your valuation. If you historically recognized revenue when cash was received, and they transition you to strict accrual accounting under GAAP, they will often shift revenue out of your high-performing trailing twelve-month period and push it into earlier periods. This artificially lowers the EBITDA multiple calculation at the finish line. To defend against this, you must analyze their adjustments using the principles of IVS 105 and focus on matching revenue with the actual performance obligations and delivery of value. If they are shifting revenue backward, they must also shift the corresponding cost of goods sold and operating expenses backward to maintain a clean matching principle. You cannot allow them to move the revenue while leaving the expenses in the current period, which double-blows your margins. Bring this issue straight to your Level 10 Meeting™ and assign a Rock to your financial team to produce a detailed transaction-by-transaction reconciliation. Show that the deferred revenue and work-in-progress calculations are consistently applied across both periods. If your operations run on a structured delivery system, use your system's data to prove when the service was completed. By matching your operational milestones directly with the accounting adjustments, you can show the buyer that their timing adjustments do not reflect the true run-rate profitability of the enterprise.