Why buyers restate your numbers, rewrite your deal, and reduce your leverage—often without you realizing it.
Key Takeaways
- Cash accounting often distorts true operating performance during diligence
- Buyers normalize your numbers to better match the timing of income and expenses
- Accrual-based clarity directly affects valuation, deal terms, and closing risk
Introduction
When business owners think about selling, they focus on revenue growth, margins, and the story behind the business. What often gets overlooked is how that story is told financially. Your accounting method—specifically cash versus accrual—can quietly undermine value and shift leverage to the buyer at exactly the wrong moment.
Why This Matters to Business Owners
Buyers don’t buy bank balances. They buy future cash flow, assessed through historical performance. That performance is evaluated using trailing twelve-month results, normalized EBITDA, and working capital expectations. Those metrics depend heavily on timing.
Cash accounting may work well for managing taxes and day-to-day operations, but in a sale process it often fails to reflect how the business actually performs. When the financial picture doesn’t align with operational reality, buyers assume risk—and they price that risk into the deal.
How Cash Accounting Distorts the Story Buyers Are Buying
Cash accounting recognizes revenue when money hits the account and expenses when bills are paid. In isolation, that sounds reasonable. In practice, it can create misleading swings in profitability that have nothing to do with how the business is really operating.
Pre-billing customers for future work, delaying vendor payments, or experiencing timing gaps in collections can all inflate profits in one period and depress them in another. To a buyer reviewing your financials, margins may look inconsistent, seasonality may appear exaggerated, or earnings may seem less predictable than they truly are. Even a strong business can appear erratic on paper when revenues and expenses aren’t matched to when the work actually occurs.
The Diligence Moment Where Deals Get Rewritten
These distortions almost always surface during diligence, particularly in a Quality of Earnings review. At that point, the buyer’s advisors restate your financials on an accrual basis to understand “true” earnings.
When that restatement reduces EBITDA, the consequences are real. Purchase prices get adjusted downward. Earnouts get introduced. Escrows grow. Timelines stretch. What began as a straightforward deal turns into a renegotiation—one where the buyer controls the narrative because they’re the first to translate your numbers into accrual reality.
What Sophisticated Buyers Expect—Whether You’re Ready or Not
Strategic buyers and private equity firms expect accrual-based financials. It’s the standard language of institutional diligence. When sellers present only cash-based statements, buyers assume additional work will be required and apply conservative assumptions from the outset.
Even if your buyer is not institutional, their lender or equity partner often is. That means accrual scrutiny is coming regardless. Choosing not to prepare doesn’t avoid this process—it simply ensures that it happens on the buyer’s terms, not yours.
Checklist: Exit-Ready Financial Hygiene
- Accrual-adjusted financials for the past 24–36 months
- Clear visibility into accounts receivable, payables, and deferred revenue
- Normalized EBITDA that reflects operating reality
- CPA and transaction advisor alignment before going to market
Final Insight
Cash accounting isn’t a mistake. But treating it as “good enough” when preparing for a sale is. Accrual accounting is less about compliance and more about control—control over your valuation, your timeline, and your negotiating position. Owners who address this early reduce surprises, build buyer confidence, and protect enterprise value when it matters most.
Schedule an Appointment
If you’re considering a future sale, now is the time to assess whether your financials would hold up under buyer scrutiny. Schedule an appointment to identify hidden risks, protect value, and prepare your business for a stronger exit.