Cashtoaccrual conversions can prompt difficult conversations

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Sellers of lower-middle-market businesses are sometimes surprised to find the revenue and EBITDA of their businesses drop once evaluated on an accrual-accounting basis, says Clay Brownlee, a Partner at Boulay. • The revised financial figures are sometimes revealed in quality-of-earnings, a form of pre-acquisition due diligence, and a standard procedure ahead of an Entrepreneurship-Through-Acquisition (ETA) deal. Many smaller, founder-led businesses use cash accounting, which records revenue when cash is received. ETA investment groups typically require accrual accounting, which records revenue when the relevant services or goods are provided. • While the drop in revenue and - by extension - valuation, can lead to difficult conversations, Brownlee says these revelations can be made less jarring if the sellers understand that all parties to the transaction are on a level playing field because the figures are being produced entirely with the seller's own data. • Brownlee makes his comments as part of the Search Party episode, When Quality-of-Earnings Reveals Cold, Hard Truths, a conversation that also includes Anthony Walker of Next Coast Legacy, Bob Boniface of TransTech and Ryan Turbes of Boulay. • Watch the full episode on the Search Party YouTube channel: • When Quality-of-Earnings Reveals Cold... • Search Party Lead Sponsor: • Next Coast Legacy https://lnkd.in/eSAuRW5p • Search Party Sponsors: • Avidbank https://www.avidbank.com/ • Boulay - Contact Boulay's Search Fund Team: https://lnkd.in/eFF88SVf • Mayer Brown https://lnkd.in/gU7sPPSg • Plexus Capital https://plexuscap.com/ • Search Party video-podcast website: https://lnkd.in/efJEa6GV • #accounting #gaap #SMB #ETA #privateequity #investing #mba #entrepreneurship

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