We have clean historical financials, but our internal accounting controls are informal. How do we institutionalize our financial controls so a buyer's Quality of Earnings audit does not find material weaknesses?

Question

Tyler Smith · Accepted Answer

Clean tax returns are not the same as institutional grade financial controls. When a buyer initiates a Quality of Earnings audit, their forensic accountants will look at how your financial data is produced, not just the final numbers. Informal controls lead to deal fatigue and price renegotiations.

To fix this, you must systemize your accounting department just like you systemize your operations. Start by mapping out your financial processes in your three-step process documentation. Define exactly who initiates transactions, who approves them, and who reconciles them.

Eliminate any overlap where one person has unchecked control over purchasing, payments, and bank reconciliation. This separation of duties is a key metric for institutional buyers. Use your weekly Level 10 Meeting to review any variances in your budget and resolve them immediately using the IDS process.

We recommend hiring an external accounting firm to perform a preliminary, buy side Quality of Earnings assessment twelve months before you launch the sale process. This proactive step allows you to identify and correct any structural weaknesses in your revenue recognition or expense categorization on your own time. When a buyer sees that your financial processes are bulletproof, their risk model drops, and your enterprise multiple goes up.