Financial statement audits can be costly and time-consuming. As a privately held company, why put yourself through the process unless you absolutely must? You might be surprised by the upsides of having audited financials.
Audits provide peace of mind
Audits are designed to detect material financial misstatements due to fraud, error, or misapplication of generally accepted accounting principles (“GAAP”). While an audit does not guarantee that your company is void of any financial statement errors, a reputable auditor is likely to detect most material issues. Auditors also perform procedures to detect errors in things like billing and cash disbursements, which can affect your bottom line.
Audits lead to process improvement
As part of risk assessment, auditors often request to walk through and inspect a company’s key financial and operational processes so they can better understand where potential exposures may lurk. Although this is time-consuming, it can be an invaluable chance for you to conduct your own self-assessment and evaluate your internal controls. In any case, knowing that an auditor could request supporting documents for any given transaction helps to promote accuracy and thorough record-keeping within an organization.
Audits give you a leg-up in obtaining credit
It’s not uncommon for lenders to require audited financial statements. It’s much easier to have audited financials in-hand ahead of time when approaching a bank than it is to scramble through an audit as the need for credit arises.
Audits add value in a sale process
An audit signals to a buyer or potential investor that your company holds attributes like accuracy, quality, and credibility in high regard. This adds real value in the eye of a buyer. GAAP compliant financials also require less interpretation and adjustment than non-GAAP financial statements. They provide a common understanding of how the financial statements were prepared. This ramps up efficiency during the due diligence process and cuts down the time it takes for a buyer to get comfortable with your financials.
Admittedly, it’s less common for small and medium-sized private companies to produce audited financials. But when they do, buyers take notice. For example, Integrity Mold had two years of audited financials under its belt when we invested in the Company, and this made the process markedly easier for all parties involved and instilled tremendous confidence in us as the buyer.
It’s also customary for a buyer to require a seller to make financial statement representations and warranties in a purchase agreement, and to disclose any departures from GAAP. When your financials are audited, you’ll have greater confidence that the financial statement representations and warranties you’re making are accurate, and you’ll benefit by spending less time identifying GAAP deviations.
At Montage Partners, annual audits are performed at all the companies in which we invest. While we’ve seen first-hand the value that audits can add, an audit might not make sense for every company. There are various considerations to make in deciding whether to engage an audit firm, not the least of which are cost, resources, and time. Nevertheless, for a company with growth ambitions or a sale in its future, a financial statement audit can be a wise investment to make—sooner rather than later.
About Montage Partners
Founded in 2004 and located in Scottsdale, Arizona, Montage Partners is a private equity firm that invests in established companies in the western U.S. with EBITDA between $1 million and $5 million. Above all other investment criteria, Montage Partners invests in exceptional people. Montage Partners provides liquidity to those who have spent years of their life building great companies, Montage Partners protects those companies through a transition of ownership and Montage Partners supports the next generation of a company’s leadership in executing on growth initiatives. For more information, please visit www.montagepartners.com.