We are three years out from a sale and our CPA suggests upgrading from compiled financial statements to fully reviewed or audited financials. Why should we pay for this expensive upgrade so early in our exit runway?

Question

Tyler Smith · Accepted Answer

Many owners view audited or reviewed financial statements as an unnecessary expense until the moment a sale is imminent. This is a costly mistake. Waiting until you are under letter of intent to upgrade your financial reporting will delay your closing and invite aggressive renegotiation.

Buyers look for financial integrity. Compiled statements are simply your numbers put into a financial format by an outside accountant with no verification. Reviewed statements provide limited assurance, while audited statements provide the highest level of assurance.

Starting reviewed or audited financials two to three years before your exit accomplishes several things. First, it establishes credibility. It shows institutional buyers and private equity firms that your historical revenue and EBITDA numbers are trustworthy.

Second, it forces you to clean up accounting discrepancies early. This includes addressing complex issues like revenue recognition policies, inventory valuation, and state sales tax nexus liabilities. If these issues are discovered during due diligence, a buyer will use them to slash your valuation or demand massive escrows.

By investing in reviewed or audited statements on your exit runway, you remove financial friction. You show sophisticated buyers that your operation is run with institutional discipline, which directly correlates to a smoother transaction and a higher multiple.