M&A: Conducting a Presale Audit

Q: What’s a presale audit and why should I perform one?

A: In a presale audit, an M&A expert reviews a selling company’s financial statements, legal records and other documents for red flags and recommends changes that can improve the company’s marketability. Considering that potential buyers perform their own extensive due diligence, a presale audit may seem like an unnecessary expense. But it can, in fact, save sellers such as you time and money because it gives you the opportunity to fix problems before they can give buyers pause — thus improving your chances of getting a good price for your business.

Looking for clues

The main goal of a presale audit is simple: Confirm and reconcile reported with actual data. Auditors look for anything that could be considered negative or inconsistent by a prospective buyer and, thus, potentially cause the buyer to reduce the offering price or even terminate the deal. An expert will focus particularly on employee and client contracts and financial records, looking for:

• Financial irregularities. Auditors typically review the last three years of a company’s financials, ensuring that the seller recognizes revenue and expenses using Generally Accepted Accounting Principles and has adequately matched actual inventories to projected inventories. If the company lists major “off balance sheet” liabilities, it signals that something might be amiss and needs to be addressed before the company goes on the M&A market.
• Outstanding lawsuits. Is the seller currently engaged in litigation with an employee, client or government entity? Auditors determine the potential financial impact of such cases and often recommend using arbitration to close them as quickly as possible.
• Regulatory compliance. Sellers need to be in full compliance with federal and state regulations that address everything from environmental protection to employee-related taxes. If they aren’t, potential buyers will find out and probably walk away.

Establishing ownership

A presale audit also ensures that your company’s most valuable assets are actually yours. Auditors will review intellectual property documentation, for example, to ensure that no conflicting ownership claims exist.

Such verification is critical to a company’s value. If, say, a business’s claim on a major patent is tenuous, it’s better to learn this before a prospective buyer finds out and significantly reduces its original offer.

Knowledge is power

If you’re planning to sell, you can’t afford to ignore your company’s flaws. A presale audit may uncover problems, but this process also provides you with an opportunity to fix them before a seller decides your business represents too much risk. 

© 2015