Year end financial decisions can enable a smoother future due diligence at time of company sale
Your business is closing out the books for 2023. Decisions are being made related to your income statement and balance sheet. Avoid a mistake often made during this process. The mistake is reflecting revenues or expenses in this latest year end inconsistent with how they might have been reflected in prior years.
Let’s fast forward to the day when you’re selling your company and a potential acquirer is doing their due diligence probe. One of their steps will be to analyze your financials and looking at year over year performance comparisons. If over the years you have been inconsistent in how certain revenues or costs are reported, this could cause year over year variances that can raise unnecessary questions by the acquirer. An inconsistent accounting methodology year over year can cause frustration and delays during due diligence. When this occurs, it can lead to the acquirer asking your team to recast financials so that all years are consistent or they may take it upon themselves to do so and all this adds unnecessary time and stress to the due diligence process.
An example of inconsistent accounting methodology relates to accruals, such as your company vacation accrual account or an employee bonus accrual. At year end if you have a negative or positive accrual, how you adjust for this can impact that years results and in some cases could be meaningful. You certainly need to adjust the accrual but you want to follow the same methodology from prior periods to avoid causing future due diligence confusion..
To avoid having this future due diligence disruption, meet with your financial team now as they are closing out the books for last year and discuss accounting methodologies to ensure consistency with prior years. Taking this step now can help you avoid a future due diligence headache.
