Our cash flow is strong, but we only have compiled financial statements instead of audited ones. The buyer is bringing in a national accounting firm for a buy-side Quality of Earnings review. How do we prepare our internal finance team so we do not get run over by their adjustments?

Question

Tyler Smith · Accepted Answer

Preparing for a buy-side Quality of Earnings audit with only compiled financials requires immediate, aggressive defense of your numbers. Do not wait for the buyer's accountants to start digging and defining your profitability on their terms. Your internal finance team must run its own pro-forma adjustments first.

Your first move is to identify all owner-related expenses, non-recurring capital expenditures, and one-time operational adjustments. Document these clearly with invoices and contracts. If you run your business using EOS®, your Finance seat on the Accountability Chart must own this preparation as a quarterly Rock. They must build a detailed ledger of adjustments that maps directly to your historical financials.

Focus heavily on revenue recognition policies. If your business bills upfront for annual contracts, the auditors will try to defer that revenue and reduce your trailing twelve months EBITDA. Have your team prepare a month-by-month reconciliation of cash receipts against actual service delivery to prove when the revenue was earned.

Have your leadership team address these financial vulnerabilities during your weekly Level 10 Meeting™. Use the IDS® process to solve accounting discrepancies before the auditors find them. Presenting a clean, pre-emptively adjusted financial pack shows the buyer that your numbers are institutionalized. This limits their ability to claim financial disorganization as a reason to discount your purchase price or demand a massive indemnity escrow.