The Importance of Financial Statements When Selling Your Company

Reviewed financials, audited financials or compilation reports, what should you have before selling?

Many business owners don't truly understand the importance of keeping well organized books/financials. As a business owner I understand how hard it is to find a good bookkeeper let alone have the time to sit down and look at numbers. As an owner your first concern is usually getting money in the door, paying employees, vendors, rent and keeping the lights on. After having three successful exits, I can tell you keeping well organized financial records from day 1 is as important as bringing money in the door. 

Financials can be difficult to understand. You may think you have a valuable company, but without well-done financial records, your business loses tremendous value over time. The more value your business loses, the more likely it is to fail. However, value sometimes leeches out of companies so slowly that owners don’t realize it until too late. Yearly reviewed financials and audits help you avoid the negative consequences of bad financial records.

Yearly Reviewed or Audited Financials?

The first question to answer is whether you need audits or yearly financial reporting. Yearly reviews are usually less expensive, but may not cover all your business’s factors. Stakeholders, including investors and vendors, use your financial statements to decide if your business is a worthwhile investment. However, yearly reporting may not tell stakeholders everything they need or want to know.

Audited financials focus on best business practices more than yearly reviews do. With audited financials, you are providing potential buyers or investors the most assurances possible on your financial statements. This is an outside CPA firm stating your financials are free of material misrepresentations and are presented in according to GAP.  The outside CPA firm will also analyze your financials independenetly and identify any risks or problems they see currently or in the future. Having Audited financial statements adds tremendous value to your company and gives buyers and investors a good piece of mind.

Additionally, you can catch and fix financial issues earlier. A small monthly issue is less likely to become an overall business issue that impedes cash flow and scares away investors. Audited financials also give you more time to do your due diligence when it comes to performance, sales, or program modification.

Is Auditing Worth the Money?

Many small businesses don’t use audits to save money. An audit does require significant time and research on the part of a CPA, so you may not want one if your business is just starting out. However, an audit can mean the difference between getting a loan or not. It could positively influence your interest rates. Having audited financials also creates tremendous value when you go to sell your company, investors and buyers LOVE seeing audited financials.

If your business accepts money from state or federal governments, or is in a regulated industry like franchising or securities then audits are required. If you don’t yet have the money for an audit, ask your banker or other financial adviser the best way to go about getting it. As a new business with no investment capital you can and should get at least Reviewed financials.

Reviewed Financials

Reviewed financials are one level below audited financials, they are done by an outside CPA firm and provide limited assurances on your financial statements. The main benefit of reviewed financials for the business owner is mainly the cost and time associated. Reviewed financials are much less expensive then an audit and don't require nearly as much time as an audit. One big difference as it relates to selling your company is reviewed statements don't include an investigation into the entity's internal control system of it's risk of fraud. This can be extremely important to banks that could be lending a buyer of your business money. Many banks will be satisfied with reviewed financial statements, but if you have the resources and audit will get you more value.

Should You Get a Compilation?

Some business owners opt for a compilation instead of an audit or review. In a compilation, your CPA or other accounting expert helps you prepare financial statements. He or she does not offer opinions on best business practices, whether your company complies with accepted accounting principles, or whether your business is a good investment. A compilation is a more “common sense” approach to your financial status.

During a compilation, your CPA will read your statements and ensure they’re free of obvious errors. Footnote disclosures, such as statements regarding your cash flow or income tax, may be omitted as long as you have not intentionally misled your CPA or any potential report readers. Your CPA will add a paragraph to his or her report, explaining you have chosen to omit this information.

Yearly reviews, compilations are inexpensive and often easier for small businesses to take on than audits. But the lack of professional opinions and comprehensive reviewing may hurt your business in the long run.

It really comes down to what stage of of your business you are in, at a minimum I recommend a compilation or preferably reviewed financial statements.