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Cash or GAAP Basis Accounting When Selling a Business?

February 19, 2018

When considering a sale, it makes sense to do an annual compiled financial statement that is presented on a GAAP basis versus Cash Basis, which is commonly used to report Income on a your tax return.  This GAAP financial can then be used for valuing and selling your business compared to using Tax Returns.

 

The reason for this is you do everything you can to minimize your tax burden.  This includes prepaying for expenses, buying inventory at year-end, buying equipment at year-end, etc. to employ tax saving strategies as advised by your tax professional or financial planner.

 

When preparing to sell, it makes sense to hire a CPA to do a Compiled Financial Statement on a GAAP basis. Why? GAAP tend to normalize income and increase Net Income which increases EBITDA. For example, companies on the NYSE that are publicly traded report on a GAAP basis because it tends to show more Net Income. As a business owner, you learn this the year you are forced to go from a Cash Basis Tax Return to an Accrual Tax Basis Return because you generally pay more taxes in the year you switch over because your taxable income increases. For this reason, taxpayers like to stay report on a Cash Basis for taxes as long as they can or until they are forced to do an Accrual Method by the IRS when they have $5 Million a year in average Gross Revenue.

 

When you are ready to sell, if you will have a GAAP basis Financials prepared, chances are, you will get more for your business and put more money in your pocket.

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