Our accounting is still done on a cash basis, and our EBITDA looks inconsistent. How do we rebuild our historical numbers on an accrual basis during our runway to prove our true operational margins?

Question

Tyler Smith · Accepted Answer

If your business has historically operated on a cash basis to minimize taxes, your financial statements will confuse and alarm institutional buyers. To attract premium offers, you must transition your accounting to accrual-based, GAAP-compliant reporting. This process requires a systematic cleanup of your historical numbers. Start by reconstructing your balance sheets and income statements for the past three years. You need to properly match your revenues with the expenses incurred to generate them, accounting for prepayments, deferred revenue, and accrued liabilities. This historical reconstruction will smooth out the artificial volatility in your EBITDA and present a true, consistent picture of your monthly operational margins. Work with a qualified CPA firm to conduct a quality of earnings assessment on these rebuilt numbers. This proactive step identifies any accounting discrepancies before a buyer's due diligence team finds them. Showing a buyer that you have already converted your books and verified your historical EBITDA builds immediate trust. It eliminates a common justification for valuation clawbacks and ensures a smoother, faster transaction process.