Owner CFO financials vs GAAP

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by a searcher from Harvard University
in Toronto, ON, Canada

1yr ago

Owner CFO financials vs GAAP

The most common century old anomaly, all brokers, investment banks and brokers are well aware of the difference, but by nature of required 'known amnesia' they forget to report the difference early on.

Here is what happens:
We all go in a deal believing the seller/CFO/CPA (to the extent of Baker Tilly Review Engagement reports)/investment banks aka glorified brokers that the financials presented are aligned with GAAP, means revenue, ebitda, cost recognitions are managed by qualified team who understands the GAAP project management principles, and no fake ebitda/revenue/low cost estimates have been added in to bluff up numbers (they now feel offended if you call it bluff, albeit I call it bluff, you BS 60 years old owner/CFO with $3m ebitda getting review engagement done by Baker Tilly has obviously mislead financials to buyers, because I will not believe BK does not know the GAAP for project based/construction industry recognition principles).

My question is: what processes, questions/checklists do you absolutely adhere to before taking deal into LOI to ensure the above does not trick you in the deal/dd?

Because this difference, unlike Addbacks are far harder to deal with as metrics will drop significantly by over 50% at any given day, if the GAAP is misled to you.

What precautionary steps do searchers take early stage, pre-LOI and $ costly dd?

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reply by a searcher 1yr ago
from University of Virginia in Simi Valley, CA, USA

Follow the money. Rebuild the Cash Flow statement using the UCA (direct) format and reconcile with banking statements. You will see gaps quickly. More on the CF analysis is here - “Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance” redacted

reply by a searcher 1yr ago
from Harvard University in Toronto, ON, Canada

I see it on all deals that we vet. The Tax bottom line is way whack than CIM. While that directs to some add backs but a major of it will be difference in cash vs accrual accounting. What is interesting to see is the Review Engagements, which do not have as much but at least some insurance, also overlooks the recognition aspects and misfires the certified report. That is most annoying out of 400 deals that we have looked at in 3 years, 99.9% deals have same story. To an extent that now I slam with 'if you are expecting a free valuation from me that ain't going to happen, so get your house in order and then reach out to us'. I am sure all searchers face this subtle lies and brokers either deliberately play along testing market valuation or they are bad brokers. Chances are 9/10 are bad brokers misrepresenting data, recently I had an experience with an Investment bank with black-tie wall street syndrome until I point blank called them out for deliberately misleading information. What I learned is to early stage identify quality brokers and not waste time on the whacks. A few of them are here on this forum.