One question business owners commonly ask me is whether or not they should pay for a reviewed or audited financial statement as part of the process of preparing for selling a business.
There’s another option which is often overlooked and more advantageous — ask your CPA to prepare a quality of earnings report, or QofE, which will provide a CPA’s opinion on the quality of your EBITDA.
Ultimately, owners in a sale process are most concerned by these main factors:
- No surprises. Keep all the facts on the table.
- Saving money. Minimize fees to outside advisors (CPAs, lawyers, consultants, advisors, etc.).
- Maximizing value. Get top dollar for the business from the right buyer.
- Speed. Get the deal done ASAP.
A QofE allows the owner to experience financial due diligence on his or her own terms. In this way, any financial issues, anomalies, non-recurring adjustments, working capital issues, sales recognition issues, accrual issues, non-GAAP (generally accepted accounting principles) compliance issues, etc. can be dealt with before buyer due diligence happens. As you can imagine, if these accounting issues are discovered by the buyer, the valuation agreed to in the letter of intent (LOI) never goes up. With time to address any accounting nuances, which exist in every business, you will have anticipated problem areas and be prepared with answers and corrective actions well in advance of buyer discoveries.
Saving Money when Selling a Business
Especially for businesses valued below $20 million, buyers understand owners’ resistance to pay CPAs for reviewed or audited financials, especially when nobody is requiring them. A QofE would replace a reviewed or audited statement in most instances, so an owner is not paying for something not required, but instead getting to the heart of what buyers are focused on, the quality of your EBITDA and validity of owner adjustments. In the long run, a QofE can be more economical than years of reviewed or audited financials.
Fundamentally, business is about trust. As a buyer, do I trust the numbers you are showing me and do I believe everything you have told me about your business? A QofE provides a professional, third-party opinion that validates everything an owner has shared about the business.
Trust leads to a premium valuation. Distrust kills deals.
After the LOI is signed, the due diligence process can look very different depending on whether a QofE is present. Without it, the buyer may hire his accounting firm to come into your company to look at your working papers and internal controls. The process takes a long time and can add four to six weeks to the closing process. These bean counters (no offense to all my CPA friends) are paid to find — you guessed it — problems. So you can imagine what happens. Yuck. Conversely, especially if your CPA is top-tier and has put their opinion in writing, a QofE allows for the buyer to save time and speed up the process. You can even negotiate the complexity of buyer financial due diligence as part of the LOI (i.e. no more questions about numbers after a certain date). As a rule of thumb, closing can take 1.5 to 4 months. As the seller, you pick which one sounds better.
Here’s the bottom line. An owner is well advised to have a CPA firm help with financial due diligence and a review of controls prior to a sale. Consider a quality of earnings report as one solution in your evaluation process.
Learn more about transitioning out of your business.