Buyers will typically require companies to present financial statements under an accrual basis of accounting, and they will likely hire a third-party firm to perform a quality-of-earnings (QofE) assessment as part of their diligence process to analyze the period-over-period accuracy and sustainability of the reported earnings.

A company preparing for an exit will benefit from proactively converting its financial statements to accrual basis accounting, thus reducing the time it takes the buyer to complete their diligence process and providing potential buyers with more accurate representations of company earnings in a period.

Reliability of Financial Information

Buyers will frequently hire a third-party firm to perform a QofE assessment to analyze the financial results of a company that is for sale. This will require sellers to have reliable, readily available data to support any financial information that is presented.

Sellers can give buyers confidence and demonstrate a strong knowledge of their business by providing transaction level details and explanations for unusual or infrequent items in a timely and accurate manner.

Having strong reconciliation policies and procedures will help prepare companies to respond timely to diligence requests and help management understand and articulate any variability in financial results or unexpected amounts on the balance sheet.

The team performing the QofE assessment will expect that any financial information for any relevant period is backed and supported by transaction details, and they will not hesitate to request such information.

The ability to provide these details will also be assessed by the QofE team, and sellers will want to have frequently requested data readily available. Accounts receivable aging schedules, accounts payable aging schedules, inventory listings, fixed asset registers, and debt schedules are common requests that should be prepared and reconciled to the balance sheet for relevant periods before the diligence process kicks off.

Business Processes

As part of the diligence process, buyers will also assess the operational efficiency of the key finance processes of a company.

Proactive and targeted improvements to key finance processes prior to engaging in a sale process will signal to buyers that management is knowledgeable and organized, and has a continuous improvement mindset. Record-to-report, procure-to-pay, and order-to-cash are common business processes that will come under a buyer’s microscope during a diligence process.

Below are some questions that management should be prepared to answer regarding the effectiveness and efficiency of their processes.

• Manual tasks versus automated tasks: Are automated tools implemented for routine tasks such as journal entries, reconciliations, and reporting? Can management easily identify areas where human error can impact the results, and what controls are in place to mitigate that risk?
• Month end close: How long does the month end close process take? How quickly can financial information be provided? What level of information is available to perform margin analysis and customer profitability?
• Financial results analysis: How often does management perform a review of the financial results? What steps are taken to investigate unexpected financial results?

• Procurement policies: Are there written policies for procurement with defined spending limits and authorization guidelines? Can management articulate the vendor selection process, and are there adequate controls in place around vendor management?
• Receiving controls: Is there a three-way match process, and who is responsible for performing this? How do operations and accounting work together to ensure accounts payable and accruals are appropriately booked?
• Accounts Payable: How quickly can the staff close the accounts payable process, and what are some of the bottlenecks or roadblocks that frequently come up? Is there a formal policy and procedure in place for payment review and approval?

• Revenue sources and customer base: How well can management articulate all sources of revenue and the target customer base? Are there any inefficiencies in the order management process, and what is management doing to address those?
• Revenue recognition: How does the company recognize revenue? How easily can management explain the underlying drivers of revenue fluctuations?
• Collection: How does the company review aged receivables? Is there an allowance or bad debt policy?

Prepare to Project Manage

Designating a project management office (PMO), either a specified individual or a team, is essential to a successful deal. There are typically numerous workstreams and parties involved in a sale process, so the PMO will play a critical role when a company is preparing to undergo an exit. The PMO tasks include:

• Acting as a centralized coordinator for any stakeholders directly affected by the exit process (i.e., internal teams, external advisors, legal counsel, and potential buyers).
• Facilitating the exit readiness process’ planning, whether from an internal or external perspective.
• Identifying, managing, and assessing any risks associated with the process to mitigate disruptions and protect the business’ interests.
• Ensuring all diligence teams are receiving the data required to prepare diligence reports for potential buyers. Large volumes of data are often required on a timely basis. Delayed or overlooked data requests could interrupt the sale process and ultimately cause a failure to close.

Final Thoughts

Owners seeking a business exit will often find themselves overwhelmed with diligence requests and pressured with extremely tight deadlines. Preparing the back office for such an exit will speed up and simplify this complex task and can help maximize the value of your investment.