How a Financial Audit Can Increase Your Valuation & Streamline a Sale Process

Here are a couple key things to consider regarding how conducting a financial audit before your business enters a sale process can increase its value and help streamline due diligence.

It is Required by Your Buyer’s Lender

As you know, most private equity transactions use debt or “leverage” to increase the investor’s return. To complete the transaction, the buyer will enter into a loan agreement with a bank that will provide a certain amount of leverage and contain certain covenants that the operating company must abide by (most notably the Debt to EBITDA ratio). Some banks will not lend to a company that has not completed an audit since it is not worth the risk to them that the company’s financials may be inaccurate. Lenders will typically require that in addition to financial covenants such as Debt to EBITDA and Interest Expense to EBITDA, a company must complete an audit within a certain time frame to remain in compliance.

Opens Up Your Universe of Buyers

Like the banks, some PE Firms or individual investors also will not consider deals that haven’t conducted an audit for the same reasons as the bank. An investment firm will typically require a multiple step approval process in which they present their proposed acquisition of your company to an “investment committee” and it is an instant source of credibility to show that your company's financials have received sign off from a reputable CPA firm.

Empower Your Negotiation

Given your buyer will be negotiating the valuation of your business based on a “multiple” of your EBITDA, it is critical to understand some of the concepts that will impact this metric. A financial audit will typically uncover any accounting practices that may be required to change to stay in accordance with GAAP and often, for business owners this can uncover positive changes that may increase your EBITDA!

Conversely, it is important to understand any material issues that may arise during the due diligence process. Professional investors always conduct a basic level of financial due diligence, including likely a quality of earnings report, so it can be extremely strategic to proactively solve any accounting related issues before they surface during a sale process.

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