In general practice, it’s almost always better to receive a third-party audit through a CPA before selling a business. This is especially true in an asset-dependent industry such as manufacturing, where depreciation, inventory and capital equipment value hold so much weight. Buyers, whether private equity or strategic buyers, look favorably at audited financials and are willing to pay a higher price if an audit was recently done. Though buyers will evaluate their financials when they conduct their own due diligence, having an audit done beforehand lends credibility. Credibility is an intangible that matters when you put your business on the market. Buyers want to know what they see is exactly what they get.
Hiring a CPA
If at all possible, you will want to seek a CPA firm that has experience handling the financials of other manufacturing businesses. CPAs can perform an audit, review or compilation of your business. Each service will vary in cost, but an audit will be the most expensive because it requires more time and effort to complete.
When determining the validity of the businesses financials, specific tests will be done to ensure that inventory is properly stated in the books. This will include price testing, control testing and inventory reserve testing. If a CPA is familiar with conducting all of these tests with manufacturing inventory, you can rest assured that the audit you receive will be as thorough as you need it to be before going to market. It’s important that you don’t choose just any CPA firm. Be sure to ask for referrals and do research to see if who you hire specializes in auditing for your industry.
The Audit Process
The purpose of an audit is to ensure than financial statements are fairly presented and that accounting best practices are followed. For manufacturing businesses, the audit will include increased scrutiny for company inventory. A CPA firm will confirm that none of your assets are misstated or listed in error. There are specific procedures CPAs must take when auditing for manufacturers because of the many ways inventory can be misrepresented in the books. This is one of the many reasons buyers love to see that a company went the extra mile to make sure financials are in order. Ensuring all assets are fairly represented can be more complex for manufacturing businesses than in other industries. A CPA will confirm that the company paid for the materials and labor they state they did and determine the proper market value for capital equipment that might be obsolete.
Prepare in Advance
Before a CPA firm gets in involved, make sure you have your documents ready to be reviewed to facilitate the process. It’s convenient if you place all of your audit documents in the same folder for easy access. You might not be able to predict everything an auditor will want to see, but do your best to provide the information you think they will need to make an accurate assessment of your financials. CPA firms might even present your businesses with a “preparation list” of action items to conduct before the audit. If you do your due diligence here, you can be sure your financial audit will be successful.
Take It From Us
Several years ago, our auditors recognized that we weren’t taking advantage of a tax credit offered for use of propane (Alternative Fuel Tax Credit.) This tax incentive applies to propane that is used as a fuel to operate vehicles like forklifts, and is offered at .50% per gallon. For us, this tax credit was meaningful and proves that sometimes paying for good third-party review can ultimately make you money.