What Your Financial Statements Have to Be Before a Buyer Will Believe Them

Nobody is going to require an audit. A buyer will price the absence of one anyway.

That is the honest shape of this question. An audit is not a condition of selling a company, and plenty of good companies sell without ever having had one. What an audit changes is how much of your earnings number a buyer is willing to take on your word, and the difference between the answers is money.

The three tiers, and what each one tells a buyer

Audited statements from an independent firm are the strongest. Somebody outside your company tested the numbers and attached their name to an opinion about them.

Reviewed statements are next. An outside firm looked, applied a lower standard of work, and said less.

Statements nobody outside the company has ever examined are the weakest. They may be perfectly accurate. There is simply nothing in the file to say so other than you.

The principle running underneath those three is the one to hold onto: a buyer prices what it cannot verify by assuming the worst version of it. Not the average version. The worst.

Why the discount is invisible

This is what makes the question hard to take seriously until it is too late.

Nobody writes you a letter saying your statements cost you half a turn of earnings. The adjustment arrives inside a number. The buyer’s model carries a little more risk, the multiple comes in a little lower, the holdback is a little larger, the representations you are asked to sign personally are a little broader. Every one of those is the same discount wearing different clothes, and none of them get labelled.

An owner never sees the counterfactual, which is the price the same company would have carried with three clean years behind it.

They are going to build their own number regardless

An audit does not spare you the examination. After you agree a price, the buyer’s accountants run a quality-of-earnings review, and it is not an audit of you. They take your adjusted earnings apart one line at a time, test how and when you recognize revenue, look at working capital, and rebuild the figure themselves out of your general ledger.

Then they compare their number to yours.

What audited statements change is where that comparison starts. A company whose last three years have been examined by an independent firm is arguing about adjustments. A company whose numbers have never left the building is arguing about the numbers, and those are very different weeks.

An audit is not a recast, and a recast is not an audit

These get confused constantly, and they do opposite jobs.

An audit tests whether your statements fairly present what happened, on a consistent basis, under GAAP. It is backward-looking and it is about accuracy.

A recast restates earnings as what the company will produce for its next owner: your compensation above market, the things that happened once, the spending that exists because you own the place. It is an argument about the future, and it is built on top of whatever the statements say.

You need the second one to sell. The first one is what decides how much of the second one survives contact with the buyer’s accountants, because every adjustment sits on a base figure, and a base figure nobody has verified gets tested before any adjustment to it does.

The timing, which is the part that actually constrains you

A buyer prices the last three years, not the current one.

So the decision is not whether to have an audit done. It is whether to have had one done, which is a different question with a different deadline. A firm engaged this quarter produces its first opinion on this year. Three examined years arrive three years from now.

This is the same clock that governs everything else in preparation, and it is the reason the work is cheapest long before anyone else is waiting on it. An owner who starts thinking about the quality of their financial record when a buyer is at the table has discovered the issue at the one point in the process when nothing can be done about it.

Consistency is worth almost as much as the opinion

Short of an audit, the thing buyers react to most is whether the record holds still.

Accounting policies that changed without explanation, revenue recognized one way in one year and another way in the next, a chart of accounts that was reorganized twice, monthly statements that do not add up to the annual ones: each of those forces the buyer’s team to rebuild more of your history, and every hour they spend rebuilding is an hour they spend finding things.

A consistent record, closed monthly, that ties from the monthly statements to the annual statements to the tax returns, is a large fraction of what an audit buys, and it costs a great deal less.

What getting it wrong costs

The deal rarely dies of this. It just prices lower, and the owner never finds out that it did.

The expensive version is worse than a discount. An owner reaches diligence with an earnings figure built on a base nobody has verified, the buyer’s team rebuilds the base and lands somewhere else, and now the argument is not about one add-back. It is about whether the number the whole price was built on was ever right. That conversation happens inside exclusivity, with the other interested parties already gone.

More on this: What a Buyer Actually Does Between the Handshake and the Money.

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This is what we do. Prism Edge gets the financial record into the state a buyer will believe before a buyer ever sees it: closed monthly, consistent across years, tying from the monthlies to the annuals to the returns, with the recast built on top of it and documented line by line. Where an audit or a review is worth the cost for a specific company, that is a decision made years ahead with the price consequence priced on both sides, not a scramble once a buyer is reading.

The full chapter on what a buyer will pay, and the chapter on what their accountants do with your numbers, are both in The Business Sale, free to download here.