PRICE ADJUSTMENT QUANDRY - CASH V. ACCRUAL ACCOUNTING

Aloha All,

I have a business purchase in process, with LOI agreement and executed. (Teaser to come soon. Let me know if you have interest...)

I based my purchase price on financial info given as part of the investment memorandum. Once the LOI was signed and I was given full financials, tax returns, banks statements, etc. I found out that they use an accrual basis for their financial reporting, but a cash basis for their tax returns. In the long run, this wouldn't be a large issue. In the short run, it means tax return reported revenue is less than cash collected revenue in a given period. To multiply the issue, they are growing regularly so expenses incurred on the front end of the cash cycle impact the profitability even more on a short term cash basis.

I am a self funded searcher. I will be using the SBA to leverage a large percentage of the purchase in order to retain equity personally. While the issue above doesn't automatically effect the business value, it directly changes how the SBA perceives the income and then subsequently the amount they will loan. The temptation would be to try to re-trade the purchase price based on the way this changes the capital structure. (Equity injection required increases by[redacted]%) At the same time, the value and potential upside of the business has not changed. .

Would you revisit the purchase price at the risk of messing up an acceptable deal?



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