Completing An Audit Before Selling Your Business: Pros And Cons
In 2018 the owner of a metal manufacturing company in Southern California asked me a question that was not easy to answer. "Should I spend the time and money to get an audit?"
His company had 8 employees and consistent revenues between $2 Million to $3 Million. He ran his accounting through Quickbooks Online and had no problem producing what looked to be reliable P&L's, balance sheets and cash flow statements.
Any business broker can share stories about horrible bookkeeping practices they’ve encountered, where owners wanted to sell a business with negligible or dubious records. This was not one of those. This company had a sharp in-house bookkeeper who paid attention to best practices.
My response was a rather lukewarm "you probably don't need to go through all that. Your reports seem to be in pretty good shape."
The owner made me eat my wishy-washy words. He went on to spend two months and $14,000 on a full financial audit conducted by a third-party CPA firm. He never confided in me, but I got the sense he had doubts about some of his company's accounting practices.
The audit did not turn up anything earth shattering apparently. What it did accomplish was put his business in an incredibly strong position for sale. The owner wound up listing his business with another broker (maybe that broker recommended the audit, I'm not sure).
The business received more than a dozen offers. The sale price came up a tad short of the asking price but they were seeking a huge multiple based on the reliability of the financials and the company's strong history. That $14,000 investment conceivably netted him half a million dollars.
Audits are a pain. Even the CPA’s who do them agree. Are they worth the hassle and expense? It's not a simple answer.
As a sales advisor, it’s almost a heavenly experience marketing a business with audited financials. I’ve been a broker of mostly Main Street businesses since 2005 and only represented one company with audited books.
There are three categories of audits - operational, financial and compliance. Most privately-held companies will perform a financial audit, conducted by an outside CPA firm. You can pretty much guarantee the work will cost a minimum of $10,000 and require more than a month.
PRO Audit Arguments:
The larger the company, the stronger the argument for a pre-sale audit. In my view, audits are most helpful for businesses doing $2 Million to $10 Million in revenues but do not operate with a controller or accounting VP. Management structure has a lot to do with the decision. Auditing helps in detecting fraud, assessing risk, studying cash flow patterns and examining controls in place.
Business buyers will grant an audited company instant credibility, reduced risk, and increased comfort, as they move forward in their pursuit of a purchase. This credibility gets reinforced by other buyers when multiple offers roll in.
In our specialty, the sale of property management and property-related service businesses, an audit is tremendously powerful. There are, unfortunately, numerous cases of mishandling of company funds, legal and compliance issues, and internal mismanagement, all of which are addressed and overcome through audits.
ANTI Audit Arguments:
There are a considerable number of small businesses where an audit doesn’t make sense. There needs to be a certain level of accounting proficiency already in place before an auditor can begin.
Companies operating on paper receipts, occasional invoices and poor cash handling are not a good fit. Neither are businesses doing $200K or $300K in revenues. If you would struggle to produce profit and loss statements or balance sheets, an audit is probably too tall a hurdle.
If you are super-sensitive to having your corporate returns examined, not a good fit. Businesses who don't perform monthly reconciliations may not be a good fit either.
Conversely, larger companies who have a controller or accounting team on staff may find audits unnecessary. The strength of their reporting will speak for itself when a buyer begins due diligence.
So fellow brokers and business owners, how do you feel if someone asks "is an audit really worth the hassle?"
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Shalonda Chappel: Escrow & Bulk Sale Services - Southern California
Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.
|William F. Ziprick, Attorney: Legal Services For Buyers And Sellers
Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.
|Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA
California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.
|Helen Yoo, New Century Escrow - Escrow Services In Southern California
Helen Yoo at New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
|Earl Carson, Business Broker: Southern California
The EARL CARSON GROUP has now partnered with Man Investment Group to offer even better and faster professional service! We continue to Sell All Business Opportunities with an emphasis on Car Washes, Auto Related, Hotels, Motels, Inns, Restaurants, Night Clubs, Wholesale and Retail: Grocers, etc.
|George Chala, Broker, Gas Stations, Car Washes - LA, Orange
I Specialize In Bringing Together Buyers And Sellers Of Businesses So That The Outcome For Each Is Optimal. Having Bought And Sold And Operated Carwashes And Gas Stations For Over 30 Years, I am Knowledgeable About What It Takes To Sell A Business And Get It Running.
|Steve Cho, Business Broker: LA, Orange Counties
Business brokerage services in the Los Angeles, Orange County California areas.
|George Lanza, Business Broker, M&A Services: Southern California
George Lanza at Plethora Businesses, a division of A Premier In Services, Inc., is a Business Intermediary Consulting Firm headquartered in Orange, California. Plethora specializes in the listing and sale of small and medium sized private businesses throughout Southern California. 714-255-8862.
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