Nate Collins is a Financial Advisor at Raymond James and a Certified Exit Planning Advisor (CEPA®). He works with a select number of business owners and their families to help achieve their financial goals. Nate provides in-depth tax-mitigation strategies and estate planning, as well as comprehensive services for family-offices. He helps owners understand exit readiness, maximize wealth transfer, gain family alignment, and prepare for “life after exit.”

nate.collins@raymondjames.com
203.635.5420

BUSINESS OWNERSHIP

A Guide for Business Owners Considering a Sale or Recapitalization

When it comes to preparing your business for sale, the accounting method you choose can significantly influence how potential buyers view your company. Understanding the differences between cash and accrual accounting, as well as the impact each can have on your financial statements, is crucial in presenting your business in the best light. Let's dive into what these terms mean and why they matter to prospective buyers.

Cash Accounting: Simplicity and Immediate Financial Status

Cash accounting is straightforward: it records revenues and expenses only when money changes hands. This method offers a clear picture of how much cash your business has at any given time. For small businesses or those with straightforward transactions, cash accounting provides simplicity and an immediate snapshot of financial health.

However, this method can present a misleading picture of long-term financial stability. For instance, it might show a large cash inflow from a sale in one month, without accounting for the associated expenses due the following months. For potential buyers, this can make it hard to gauge the true profitability and operating efficiency of your business.

Accrual Accounting: A Comprehensive View of Financial Health

Accrual accounting, on the other hand, records revenues and expenses when they are earned or incurred, regardless of when the cash transaction occurs. This method provides a more accurate picture of a company’s financial health over time. It accounts for all commitments and obligations and matches related revenues and expenses in the same reporting period.

This comprehensive view is particularly useful for businesses with complex sales cycles, inventory that fluctuates, or services that span several billing periods. For potential buyers, accrual accounting offers a more reliable depiction of a company's performance and profitability, essential for making an informed investment decision.

Why the Difference Matters to Potential Buyers

The choice between cash and accrual accounting can significantly affect the financial portrayal of your business:

• Revenue Recognition: Under cash accounting, revenue appears only when money is received, which can vary significantly from month to month and obscure the true sales trends. Accrual accounting smooths this out by recording revenues when they are earned, providing a clearer picture of revenue generation.

• Expense Matching: Accrual accounting matches expenses with the revenues they generate, which is crucial for potential buyers assessing the profitability of your business. This method shows the actual costs of doing business against the revenue produced, offering a more accurate measure of ongoing profitability.

• Future Projections: Accrual accounting allows for better financial forecasting and budgeting. For a potential buyer, understanding the future cash flows is pivotal, and accrual accounting’s comprehensive data facilitates more accurate projections.

• Compliance and Credibility: Generally Accepted Accounting Principles (GAAP) favor accrual accounting. Businesses adhering to these principles may find it easier to attract serious buyers, as it reflects a commitment to maintaining standardized business practices.

Choosing the right accounting method impacts not just how you run your business day-to-day, but also how attractive your business appears to potential buyers. While cash accounting may be simpler, accrual accounting provides a more comprehensive view of a company’s financial health, making it a critical tool for business owners aiming to prepare their business for sale. Understanding these differences and how they affect your financial reporting will not only help you keep better track of your business performance but also be a key factor in securing the right buyer when you decide to sell.

Contact Nate Collins at nate.collins@raymondjames.com to discuss your business and personal finance goals.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nate Collins and not necessarily those of Raymond James.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Donors are urged to consult their attorneys, accountants, or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.