Cash accounting deals

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October 11, 2023

by a searcher from IESE Business School in Chicago, IL, USA

Hey all!
Anyone worked on or closed a deal that used cash accounting as opposed to accrual? Did you recast the financials, pay an accountant or just worked through the deal as-is? Curious to stories on how to move forward?

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
1) Everyone agrees Accrual is preferred over Cash. However,
2) Many businesses are Cash basis. To convert Cash to Accrual, one needs a lot of data. Most businesses do not have that.
3) QoE can convert Cash to Accrual but that is often limited to a short period, often 1 year.
4) In general, Cash profit is lower than Accrual. This is especially true in a growing business. I am assuming A/P is normal.
5) Many businesses have hybrid Cash/Accrual.
6) Accrual does not mean all is great. Even if it is "all" Accrual, two CPA firms will have different profitability.
7) One must review 5 years of P&L and Balance Sheet. Depending on P&Ls alone w/o reviewing associated Balance Sheets is very, very risky.

There is a way to get "comfortable" with Cash financials for valuation. Each situation is unique. Happy to discuss. I cover this in many of my classes. DM me.
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Reply by a searcher
from California State Polytechnic University in San Diego, CA, USA
It depends....Most smaller deals, under $2m, are mostly cash basis and depending on the industry and business model, are probably easier to plan, work with, and evaluate than accrual books. You can recast to your hearts content but are you doing it because that's what you do on all deals or because it makes sense for that business. QOE also gets mentioned a lot but most deals have elements of a QOE built in if you're doing any type of diligence. Like you don't need a formal workbook/presentation if you understand a business and it's revenue. Here's the kicker, no one is really 100% cash accounting, it's usually a mix of cash basis, tax basis, and modified cash basis. So the real question at the end of the day is, do you understand the business (industry, business model, operating cycle, cash flow, etc)?
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