How you prepare your financials has major implications when selling your staffing company. Valuation multiples are applied to accrual-based EBITDA — not cash-based figures — and the difference between accounting methods can yield dramatically different outcomes for founders.
How you prepare or track your organization’s financials (P&Ls and balance sheets) has important implications beyond understanding the true financial health of your company. Given Momentum Advisory Partners’ focus in M&A within the staffing industry, this article covers the specific implications of financial reporting as it relates to a potential sale.
We work with staffing organizations of all shapes and sizes. Some have internal accounting departments, others have a controller, finance manager, or bookkeeper. In some cases, the owner/operator tracks financials themselves or utilizes their outside CPA. Regardless of your organization’s size, your approach to financial reporting may have significant implications when it comes time to sell your company.
What Is the Difference Between Cash and Accrual Accounting?
Understanding the two primary accounting methods is key to making informed financial decisions, especially when considering a sale. Each has its own distinct approach to recognizing revenue and expenses.
Cash-Based Accounting
Cash-based accountingAn accounting method that recognizes revenue and expenses only when cash is physically received or paid out. While simpler to maintain, it does not track accounts receivable or accounts payable, creating significant blind spots in working capital visibility. is a method that recognizes revenue and expenses only when cash is received or paid out. It’s a simpler approach and is often favored by small businesses due to its ease of use and potential tax advantages.
Since cash accounting focuses solely on cash inflows and outflows, it doesn’t track crucial balance sheet items like accounts receivable (money owed to the business) and accounts payable (money the business owes to others). This creates a significant blind spot when it comes to understanding a company’s working capital needs. Without this information, businesses may struggle to anticipate and manage cash flow effectively, which can lead to unexpected shortfalls.
One of the main reasons businesses opt for cash accounting is its potential to defer income recognition for tax purposes. By delaying the recognition of revenue until cash is received, businesses can potentially lower their taxable income in a given year, leading to reduced tax liabilities.
Accrual Accounting
Accrual accountingAn accounting method that recognizes revenue when earned and expenses when incurred, regardless of when cash changes hands. This method provides a more accurate and consistent picture of financial performance across reporting periods and is the standard expected by buyers in M&A transactions., on the other hand, recognizes revenue and expenses when they are earned or incurred, regardless of when cash changes hands. Accrual-based financials enable more meaningful financial analysis and comparisons over time by presenting a consistent view of revenue and expenses across periods, allowing you to identify trends, assess profitability, and make informed decisions about the future direction of your business.
Accrual accounting demands a deeper understanding of accounting principles and can involve more complex calculations. In the staffing industry, recognizing revenue over time for long-term placements, accurately matching the associated expenses (especially when assignments span multiple months or begin mid-month), and aligning these with varying frequencies of client invoicing and pay periods can be particularly intricate. Given these complexities, consider either hiring an internal accounting professional or partnering with an external accounting firm.
Why Do Buyers Rely on Accrual Financials in M&A?
When it comes to evaluating a potential acquisition, strategic and financial acquirors rely heavily on accrual-based financials to assess a company’s financial health and determine its value. They want to see a consistent and reliable track record of financial performance, which is best reflected through accrual accounting.
Critically, valuation multiplesIn staffing M&A, a company’s purchase price is typically expressed as a multiple of its EBITDA. These multiples range from approximately 3.5x to 10x depending on factors including the staffing segment (IT, healthcare, light industrial), company size, growth trajectory, customer concentration, and market conditions. in M&A transactions are applied to accrual-based EBITDAEarnings Before Interest, Taxes, Depreciation, and Amortization. A key profitability metric used in staffing M&A to assess operating performance and determine company valuation. EBITDA strips out financing decisions, tax strategies, and non-cash charges to focus on the core earning power of the business. (Earnings Before Interest, Taxes, Depreciation, and Amortization), a key metric that reflects a company’s operating profitability. Your company’s EBITDA under cash vs. accrual methods could vary widely, yielding very different valuation outcomes — which could ultimately lead to surprises and disappointment down the line.
How Does the TTM Methodology Affect Your Valuation?
Although buyers look at historical, current, and projected financials, we value staffing businesses on a trailing twelve-month (TTM)A valuation methodology that examines the most recent 12 consecutive months of financial performance, rather than relying on the last completed fiscal year. TTM EBITDA provides a more current and accurate picture, especially for growing businesses where recent performance exceeds prior-year figures. basis. Having monthly data allows us to compile the TTM EBITDA, ensuring a more up-to-date and accurate valuation.
If your business is growing, the TTM EBITDA will likely yield a higher valuation than relying on older, annual figures. Consider this: evaluating a business in September 2024 while only having accrual financials for the full year 2023 creates a significant gap. Interim or monthly financials bridge that gap, giving buyers a current view of performance and growth trajectory.
To ensure a smooth and successful M&A process, make sure you have full-year financial statements going back a few years. It’s not only important to maintain your accrual-based financials on an annual basis — it’s equally important to maintain them on a monthly basis. Many companies that maintain their financials using the accrual method do not track them monthly, which is a missed opportunity.
What Are the M&A Advantages of Having Accrual Financials Ready?
Beyond the core valuation impact, accrual-based financials provide several strategic advantages during the M&A process.
Streamlined due diligence. Up-to-date financials demonstrate preparedness and professionalism, streamlining the due diligence process and instilling confidence in potential buyers. Organized, accrual-based records signal that the business is well-managed.
Stronger negotiation position. Having a clear and accurate picture of your financial performance strengthens your negotiation position, allowing you to justify your asking price and potentially achieve a higher valuation.
Reduced risk of re-tradesA re-trade occurs when a buyer seeks to renegotiate the purchase price or deal terms after initially agreeing to them, typically based on negative findings during due diligence. Accurate, well-organized financials significantly reduce the risk of re-trades by minimizing surprises.. Accurate and up-to-date financials minimize the risk of surprises during due diligence, reducing the likelihood of buyers seeking to renegotiate the deal terms based on unexpected financial discrepancies.
For a comprehensive overview of all the steps involved in preparing for a sale, see: Preparing for a Sale of Your Staffing Business. For how accounts receivables factor into a staffing M&A transaction, see: Accounts Receivables in Staffing M&A.
How Should You Prepare Your Financials Now?
Even if you’re not actively planning to sell your staffing business, having accrual-based financials in place is a smart business practice. It provides you with a clearer understanding of your company’s financial performance and positions you for a smoother and more successful M&A process when the time is right.
If you have a CFO, controller, or finance manager experienced in accrual accounting, you’re likely in good shape. However, if you lack such expertise in-house, it’s highly advisable to engage a third-party accounting firm to assist you. They can help prepare your financial statements — including your income statement and balance sheet — on an accrual basis, or ensure that your existing accrual-based financials are accurate.
Remember, it’s not enough to have accrual-based financials prepared only annually. Ideally, you should have them available on a monthly basis to provide a more up-to-date and granular view of your company’s financial performance. This level of preparedness will not only benefit you in M&A but also enhance your overall financial management and decision-making.
Being proactive and maintaining well-organized, accrual-based financials is a strategic investment that can pay off significantly when it comes time to sell your staffing business. At a minimum, ensure you have monthly accrual financials going back 2–3 years, with balance sheets that track accounts receivable and payable. The cost of converting now is a fraction of the value you risk leaving on the table.
Frequently Asked Questions
Valuation multiples in staffing M&A are applied to accrual-based EBITDA. Accrual accounting provides a more accurate and consistent picture of financial performance by recognizing revenue when earned and expenses when incurred, which is essential for determining a business’s true value.
TTM (Trailing Twelve Months) EBITDA measures the most recent 12 months of operating earnings. In staffing M&A, businesses are valued on a TTM basis rather than the last full fiscal year. If your business is growing, the TTM EBITDA will likely yield a higher valuation. Monthly accrual financials are required to calculate it accurately.
You should have full-year accrual-based financial statements going back at least 2–3 years, along with monthly financials for the current and prior year. This gives buyers the historical track record and current performance data they need to evaluate the business accurately.
Yes. Engage a third-party accounting firm to prepare or convert your financial statements to an accrual basis. It’s advisable to have at least 2–3 years of accrual-based financials before entering the M&A process, so starting early is recommended.
A re-trade occurs when a buyer renegotiates the purchase price or deal terms after initially agreeing to them, typically based on negative findings during due diligence. Accurate, up-to-date accrual financials minimize financial surprises, significantly reducing the likelihood of a buyer seeking to re-trade.