Obtaining audited financial statements is always best when valuing an acquisition prospect. An audit enhances your confidence and ensures what management has presented is a “true and fair” view of the company’s financial performance and position.
We run into plenty of privately-held, middle market companies that don’t have audited financial statements. Many have their financial statements reviewed by an accounting firm which is a good step in the right direction, but others may not. While its best to get audited financials, a firm without audited or reviewed financial statements is not immediately disqualified from being a good acquisition prospect. Getting an audit can be expensive and many entrepreneurs have never even considered it.
If your acquisition target doesn’t have audited or reviewed financial statements, you can still take steps to determine the accuracy of the financial information provided to you.
Most companies have some sort of accounting software such as QuickBooks. Take a look at these results and make sure they are consistent year to year.
Next, ask for the tax returns. Tax returns are a great way to verify the information reported in the company books is true. The owner probably will not report false statements to the federal tax authorities, but they might be willing to bend the truth when speaking to you. If you find the tax returns show something substantially different from what is reported in QuickBooks, you should ask the seller to explain the difference.
