A construction management software-as-a-service (SaaS) business (the “Company”) supporting hundreds of construction projects across its client base was recently acquired by a leading private equity group (the “Sponsor”).

Pre-acquisition, the Company’s books were maintained on a cash basis accounting. While it was clear the Company generated ample liquidity, cash basis revenue accounting was obscuring visibility into common SaaS-related key performance indicators (KPIs), such as monthly recurring revenue (MRR), annual recuring revenue (ARR), retention, upsell, churn, and cash EBITDA.

Further, conflicting revenue-related information provided by the Company’s sell-side and Sponsor’s buy-side financial due diligence (FDD) partners added additional confusion to post-acquisition reporting. To that end, Stout (the “Firm” or the “Team”) was engaged to provide an accelerated management reporting uplift and a cash to accrual (i.e., GAAP) basis of accounting conversion.

Historical Period Accounting Analysis

Our immediate first steps were to perform a historical assessment of the prior two years of the Company’s financials at a granular general ledger level of transaction activity to digest and outline the key material accrual adjustments required to uplift accounting.

Post assessment, we reviewed the results with Company management, leveraging the Team’s technical accounting expertise, to ensure the rationale and need for the accounting changes was clearly understood. Once we and Management were aligned, we documented the adjustments required, the accounting guidance to support the adjustments, and the appropriate method to account for the new accruals on a go-forward basis.

Management Reporting Uplift

At the time of our engagement, the Company had not produced dependable financial reporting since the end of the FDD process approximately six months prior. Further, the Transaction’s FDD reports offered inconsistent, and in some instances incomplete, revenue data causing uncertainty as to the “starting point” of accurate financial information. Given the Sponsor’s urgency to assess the immediate performance of the business post-acquisition, we deployed Stout’s management reporting methodology to establish a package that would allow the company to produce materially accurate pro-forma financials until accrual-based books and records were put in place.

Appreciating the need for accurate revenue data, we worked with Company management to review customer transactions invoice-by-invoice and build a recurring revenue tracker, outlining the adjustments required to true-up top-line revenue from cash basis to accrual basis. We ensured the supporting recurring revenue spread sheet was digestible on a per-contract and customer basis to facilitate the development of SaaS-related KPIs.

Once revenue was outlined, we leveraged the FDD reports and the Team’s own historical period accounting analysis to isolate the most substantive pro-forma accrual adjustments required to ensure financial information was reported within a clearly material level of accuracy. To support these adjustments, we incorporated easy-to-use accrual maintenance schedules to effortlessly layer over accounting adjustments to the company’s cash basis trial balance.

After thoroughly reviewing the outputs of the pro-forma adjustments to ensure accuracy, we worked with the Sponsor to build the reporting package’s outputs in a manner sufficient to assess business performance. We then rolled forward the pro-forma financials through the unreported months. After the Sponsor determined that the Company’s results (both in terms of revenue KPIs and profitability) were lower than forecasted, we worked diligently to verify the accuracy of the financial reporting. Once the results were verified, we coordinated Management’s response to the Company’s results, providing the operational drivers of the Company’s lagging performance.

Satisfied by our ability to quickly deliver usable financial information, the Sponsor engaged us to maintain the pro-forma management reporting package for the next four months until a resource was hired internally capable of driving the reporting.

Cash to Accrual (GAAP) Conversion

Our pro-forma management reporting package offered a materially accurate placeholder that allowed the Sponsor to assess the Company’s performance. However, it was imperative that the Company maintain fully GAAP-aligned and reconciled books and records within the Company’s systems to ensure quick, dependable financial information was readily available and to support anticipated growth.

Leveraging the historical period accounting analysis, and documented conclusions, we developed a month-end close lead sheet (i.e., balance sheet reconciliation schedule) and close checklist. Where available, we compiled the required supporting reconciliations to verify existing account balances and incorporated the information into a monthly close workbook. In instances where new accruals and/or accounts were implemented, we created the necessary supporting reconciliation schedules and incorporated the schedules into the monthly close workbook.

Affter the full monthly close workbook was established, we outlined step-by-step instructions for each balance sheet account that the Company would need to perform to ensure the accrual basis balance sheet was maintained accurately, and all corresponding month-end entries and adjustments would be routinely entered into the system.

After conducting detailed walkthrough sessions with Management, we closed the books for the first month post-acquisition and transitioned the maintenance of the month-end close schedule to the Company.

Conclusion

Our ability to rapidly deploy its processes and methodologies to upscale management reporting and the underlying accounting allowed the Sponsor to obtain previously unavailable insights into the Company’s performance. Our quick action was ultimately necessary given the Company’s underperformance against budget. With our assistance, the Sponsor was able to implement steps to take corrective actions and maintain a favorable relationship with the Company.