Prepare Ahead for Investor Due Diligence

Are you considering bringing in outside investors or selling your company?

What do you need to do to prepare for investor due diligence?

Are your financial statements investor or buyer ready?

Are your financial statements GAAP compliant?

Investors are looking for financial statements that are materially accurate. Therefore, they expect your financial statements to be GAAP (Generally Accepted Accounting Principles) compliant before investing. Investors may also require a financial statement audit or review by an independent CPA firm.

You should hire a CPA who knows your industry and has had experience preparing a company to sell that is similar to yours. CPAs charge a fixed hourly rate. Their work focuses on preparing financial statements required as part of buyer due diligence and assisting the business owner with tax planning.

Your historical financial statements should include the past three years’ profit-and-loss statement, balance sheet, and cash flow statement.

To get your company audit-ready, consider the things listed below.

Accrual basis accounting

Many companies operate on a cash basis for tax purposes but neglect to account for accrual accounting, which GAAP requires. Areas typically neglected are prepaid expenses, payroll accruals, vacation and benefits accruals, bonus payouts, and stock incentives.

Significant estimates

Estimates include the allowance for doubtful accounts, inventory reserves, and useful lives of assets. Estimates are highly judgmental. Looking at historical trends may be helpful to complete an accurate analysis.

Record retention

The CPA will audit your historical financial statements and take a close look at material areas of your balance sheet and income statements. These include vendor invoices, confirmation of products sold, cash deposits, debt, or other significant agreements. In addition, you should be prepared to provide data for transactions that occurred several years ago.

Inventory

For companies that distribute or produce products, inventory is the largest and most complex asset on the balance sheet. As a result, auditors will review the physical inventory count and inventory valuation.

The amount of inventory recorded on your balance sheet will be tested by completing a physical inventory count that the CPA observes. If a physical inventory is not completed on the balance sheet date, you will need to roll back your inventory to the beginning balance of the periods under audit. In addition, all purchases, sales, write-offs, and other adjustments will need to be reconciled and tested during the audit.

The cost of inventory will also be tested. All labor and overhead costs related to inventory should be included in the inventory cost to be accounted for as the cost of goods sold later when the inventory is sold.