Most would agree that good accounting and recordkeeping help make the due diligence process during a sale run smoothly. I would challenge that good accounting has a deeper impact. What we should be thinking about is the robust accounting and finance team’s ability to position your company for a larger exit, or even avoiding reductions in your original agreed-upon sale price. High-quality accounting and finance can be the difference between a seven-figure exit and an eight-figure exit.
What Makes Accounting Critical to an Exit?
When we think valuations, often we think first about robust sales growth, efficient delivery, happy customers, and market share.
A disjointed accounting team, the pain of stale receivables, lack of clarity on customer retention, inability to analyze and understand margins, and overall sloppy accounting causes stress for the acquirer. A lack of transparent and accurate financial information leads to increased skepticism and scrutiny. Without solid accounting, you are standing on unstable ground with your buyer, and even with the best of intentions, disagreements and disputes can arise. Accurate, clear, and documented accounting records and policies builds trust between you and your acquirer.
Having a team of CPAs to assist you prepare and position your company in advance of an exit will greatly increase your odds of success.
Could the Deal Really Go That Sideways Over Accounting Records?
Unfortunately, yes! We have seen it firsthand, being called in by legal and tax advisors asking us for urgent help in cleaning up accounting records or assisting with a dispute in the financial results.
In 2023, our phone rang again a when a small group of owners decided to exit their business after having successfully built the company and its brand into a multinational organization with a decade of profitable results. The sellers agreed to an acquisition which included an earn-out. The earn-out was to ensure that revenues returned to pre-pandemic levels. The sellers stayed on and very successfully managed the business and returned revenues to pre-pandemic levels, ensuring relationships were in good place to transition to the buyer.
However, the seller’s internal accounting records had suffered during the pandemic due to turnover in their accounting team. These problems were not remediated prior to the sale. After identifying several accounting inconsistencies, the buyer became distrustful of the financial records and hired a team of external CPAs to scrutinize the internal records. The buyer group then countered with a claim that millions of dollars in revenue were not legitimate and should not count towards the earnout. The supporting documentation included hundreds of pages details and schedules, creating a dizzying maze of accounting ledgers and alleged discrepancies.
We worked with the sellers and their legal counsel to prepare a response, sifting through the blurry PDFs and poring over customer accounts and reconciliations to construct the actual results and rebut the buyer’s claims. Through the course of our review, we determined that:
- The buyer’s level of distrust was a result of inaccurate accounting practices, prompting them to take an aggressive stance on disqualifying certain revenues.
- By misapplying GAAP and dissecting the definitions within the sale and purchase agreement, the buyer had different interpretations of the guiding light that form takes place over substance.
- No one is immune to making mathematical errors and duplications, not even CPAs, and secondary reviews should be a part of everyone’s process.
- An understanding of the history of the client’s business, the transaction, and original closing schedules were critical to positioning our client for success.
At the end of the day, we were able to sift through all of the records and prove out revenues. Our client was successful in proving that they had in fact met their earn-out provision and received their full payout.
How Can You Be Prepared?
Professionalize and invest in your accounting and finance function by working with CPAs experienced in due diligence and the things that matter to sellers/acquirers. CPAs should be on your team as you move through the sale – their expertise is not just for tax strategies and compliance. They are valuable business partners in an exit.
If your organization is looking for assistance with your core accounting, compliance, or advisory needs, reach out to our Outsourced Accounting Solutions team. Our expert CPAs will ensure that you’re receiving custom-fit solutions that allow you to shift your focus away from the back office, and towards growth.
