Evaluating and Cleaning Up Accounting Practices and Records

Evaluating the state of a company’s current accounting function is not a routine task; it is a strategic necessity. Insights learned during analysis and evaluation can serve as the foundation for financial reports presented to potential buyers and investors. A thorough assessment of existing financial practices can also help ensure compliance with current regulations, provide comparability to industry metrics, and demonstrate a firm grasp of the company’s financial and operational performance.

Common issues that may be revealed during the evaluation and due diligence stages of the transaction include the following:

• • Inconsistent application of accounting policies.
  • Incomplete financial records.
  • Lack of consistent reconciliations of supporting data to financial statements.
  • Inaccurate financial statements.
  • Weak management of working capital.
  • Poor cost and debt management.
  • Inaccurate asset valuation.
  • Noncompliance with U.S. GAAP, IFRS, and regulatory standards.

Overlooking these issues or failing to correct them can delay or even derail a potential M&A transaction. However, the accounting strategies described below can help increase confidence in a company’s finances, lessen overall risks, and decrease the potential for value erosion and surprises.

Preparing Clear, Accurate Financial Reporting

Accurate financial reports serve as the foundation upon which investors base their decisions, providing them with a comprehensive understanding of the company’s financial health and performance. By presenting financial statements that are both precise and transparent, sellers can effectively communicate the true value of their business. This transparency not only aids in building trust with potential buyers and investors but also can position the company as a credible and reliable investment opportunity. Meeting investor expectations through meticulous reporting can significantly enhance the attractiveness of the business, ultimately facilitating a smoother transaction process.

Conducting Diligence

A comprehensive diligence process is essential when evaluating business performance during a sell-side transaction. This process typically begins with gathering and organizing all relevant financial documents, including income statements, balance sheets, and cash flow statements. A detailed analysis of these documents can enable the identification of trends, anomalies, and areas that require further investigation. During due diligence, it is important to evaluate the company’s internal controls and compliance, helping to ensure that the company is operating within the appropriate framework and adhering to industry best practices.

To properly assess the overall performance and potential risks associated with the business during due diligence, several key areas of focus may be prioritized:

• Financial performance may be scrutinized to understand revenue streams and revenue recognition practices, profitability, and cost structures.
• Operational efficiency may be evaluated for the effectiveness of the company’s processes and the management team’s capabilities.
• Market position and competitive landscape may be analyzed to gauge the company’s growth potential and strategic advantages.

The diligence process provides valuable insights that can help decision-makers identify strengths, weaknesses, and opportunities within the company.

Adjusting Accounting Practices

Whether to adjust accounting practices or not sometimes depends on the needs of the acquiring entity. For example, a seller might use cash accounting methods, but a potential buyer may prefer accrual accounting, particularly if revenue recognition is accelerated under cash accounting methods.

Normalizing financial statements to reflect the true economic performance of the company may be necessary. In some cases, this may require removing non-recurring expenses to present a clearer picture of sustainable earnings. Sellers might need to adjust revenue recognition practices to ensure compliance with accounting standards, which can be particularly challenging for companies with complex revenue streams or long-term contracts. These and similar adjustments may be crucial to the transaction by providing a more accurate representation of the company’s financial health, historical performance, and future earnings potential.

The technical complexity of certain adjustments, such as those related to revenue recognition or fair value measurements, may necessitate the involvement of external accounting experts. This is especially true for companies that lack the resources or experience to tackle the workload or technical accounting burden of a sell-side accounting diligence process in addition to their normal day-to-day tasks. Experienced financial advisors or consultants can provide valuable guidance and support in such situations. Companies may proactively address accounting challenges before a transaction is even in the planning stages because doing so can enhance a company’s financial reporting and build greater trust with potential investors.

Bolstering the Accounting Team

A robust accounting team becomes increasingly vital while preparing for and during a sell-side transaction, yet companies often lack the resources needed to meet the heightened reporting and diligence requirements. During rigorous scrutiny from potential buyers and investors, the company’s accounting team must be equipped to handle complex financial analyses, as well as identify and address any necessary adjustments to the company’s current and historical figures. A seasoned team that is prepared for sell-side transaction accounting not only aids in presenting the company in the best possible light but also helps identify and mitigate potential risks that could arise.

Companies may elect to bring in additional resources to manage day-to-day accounting tasks, allowing the core team to focus on the more critical aspects of the transaction process. Conversely, engaging external consultants may bring knowledge and experience — at both accounting and industry levels — that can help the company navigate complex accounting issues and confirm compliance with relevant standards.

Timing is everything. Management teams often wait until they are ready to begin a process to self-reflect on their team and processes, causing a costly rush to improve financial reporting and accounting capabilities. Proactive focus on the aforementioned aspects of its accounting team allows a company to be prepared to take advantage of opportunistic market conditions. Bolstering the accounting team with both internal and external resources can help a company involved in a sell-side transaction manage the increased demands on its accounting team.

Seizing Opportunities Amidst Preparation

Attracting Investment

Companies that have successfully showcased their financial health through detailed and precise reporting often find themselves in a stronger position to attract competitive bids. Accurate financial reports offer a more transparent view of the company’s current and historical performance, providing reliable data that informs potential buyers and investors.

Presenting clean financials prepared after comprehensive due diligence can potentially enhance the company’s valuation. Prospective buyers can assess the true value of the business without the fear of hidden liabilities, financial discrepancies, or other unpleasant surprises. Placing a strategic focus on transparency and accuracy may transform the sell-side process into a significant opportunity for growth and success.

Written by Brian Black, Osmar McIntosch and Patrick Tye. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

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If you’re preparing to sell your business, you may have heard the term due diligence. But unless you’ve been through an M&A deal before, you might not know what the due diligence process entails.

What is the due diligence process?

Due diligence is a process a prospective buyer follows to confirm that what the seller says about the business is accurate and uncover any issues that might negatively impact business value or tank the deal altogether.

Many sellers believe if they’ve gone through a financial statement audit in the past, then due diligence should feel pretty familiar. However, the due diligence process is so much more.

What elements does a buyer consider when they perform due diligence?

The due diligence process often starts with an examination of the business’s financial records. If you have an annual financial audit, this part of the process should be much faster and easier.

Other areas a buyer may dig into include:

• • Buyers will want to review contracts for all major business relationships, including real estate and equipment leases, supplier and customer agreements, and employment contracts.
  • Tax compliance. Buyers want to examine the different types of taxes that may be imposed on the business and the various tax jurisdictions in which the company might have physical or economic nexus. This includes income taxes, sales, and use taxes, payroll and employment taxes, property taxes, excise taxes, etc.
  • Buyers want to determine whether the company’s major customers will continue doing business with the company after the sale. This can be tricky if you don’t want to alert customers to the fact that you’re selling the company.
  • Information technology. Buyers will look at the company’s IT infrastructure and processes to evaluate the security and financial risks. This assessment might cover technical debt, software licensing, and how sensitive data is managed and protected.
  • Buyers may read employee reviews on sites like Glassdoor to understand how employees view the company. They may also want to survey employees on company culture. Again, this step can be tricky if you aren’t ready to discuss a potential sale with employees.
  • The buyer will review the company’s insurance policies dating as far back as possible to determine whether the company’s existing insurance covers its risks, what deductibles or retentions apply, any applicable exclusions, and whether the policies address assignments. They may also look at claims history and pending or potential claims that might erode policy limits.
  • Market reputation. The buyer may evaluate the target company’s standing in the market by looking at social media sites and reviews on Google or Yelp.

This is far from a comprehensive list of what a buyer might look at during its diligence investigation, but it’s a good starting point for preparing for a sale.

How long does the due diligence process take?

According to the United States Chamber of Commerce, a reasonable investigation into a business generally takes 60 days, but in our experience, the process can take much longer—especially if you’re not prepared.

That’s why it’s crucial to bring your CPA in early on. Your accountant knows your business and what an acquiring company will be interested in. They can help you do your homework before entering the process, so you’re prepared when the request list comes in.

Often, buyers are represented by a firm that doesn’t tailor its diligence checklist and sends a 25-page document asking for information that doesn’t apply to the target business. This can be overwhelming for sellers, and your CPA can also help determine what is and isn’t applicable and how to respond.

For most business owners, selling a company isn’t an everyday event, and it can have a dramatic effect on day-to-day operations. Remember that you need to continue running the business during the diligence investigation, which can be challenging if you’re not prepared for the work involved.

Dropping the ball at any time during the due diligence process can cause profits to suffer and the deal to fall through. To maximize your chances of selling your business for the best possible price, it’s a good idea to proactively look at your company the way a buyer would. Contact your Walter Shuffain advisor for help.

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Preparedness takes many forms, from creating a disaster plan, complete with supply kits and evacuation routes, to safeguarding your business with communication templates and IT backup. This article will explore the steps business owners can take both before and after a disaster strikes to protect their company, employees, clients, and the community.

Before Disaster Strikes

• Acknowledge and accept. Perhaps you live in an area that is rarely hit by nature’s wrath – don’t be lulled into a false sense of security due to a lack of recent activity. Disaster preparedness is something you can’t fully appreciate until you need to use it. Having a plan in place costs virtually nothing but can save you everything.
• Have a conversation. It’s important to begin your preparedness campaign at a table with key members of your organization as soon as possible. The emergency planning process will take time to design and implement. We advise hosting a few brainstorming sessions to discuss every aspect of disaster recovery – from assets to communications to continuity of services. It’s important to educate yourself on the kind of emergencies that could affect your business and develop an operations plan for each. Take the time to review potential blind spots and fortify your information systems.  Consider the following vital points.
  • Make sure your records are regularly updated and that current and critical projects are available from the cloud at all times.
  • Document your assets both in writing and with pictures.
  • Review federal and state laws regarding payroll during a disaster and determine if your payroll provider has a fiduciary bond in place.
  • Designate one or two-point persons to reach out to employees, clients, and agencies like the IRS and your insurance company report in the event of a disaster. Include contingency plans for communicating without landlines and cell towers and review emergency texting solutions.
  • Preparation only goes so far – to make sure all your hard work doesn’t have a fatal glitch, set up a time during non-business hours to practice an emergency drill.
  • Once you’ve had an opportunity to discuss your emergency plans, it’s time to put it in writing. Be sure to review and update your emergency plan at least once per year.

After Disaster Strikes

• Be prepared for the practical steps that follow a disaster. Accounting rules remain firmly in place after a disaster. Following these steps can help you limit economic harm to your business and better position you to claim financial relief through your insurance company, the IRS and other sources.
  • Account for inventory losses as soon as possible. When it comes to reporting losses on your tax return, don’t forget to adjust for insurance reimbursements.
  • Account for property damage. If your business sustains any damage that was not reimbursed by insurance, you may be able to claim a deduction on your taxes.
  • Keep payroll in motion or resume payments as soon as possible. You are legally obligated to pay your people, even if your lights are out. Review local, state and federal laws concerning how you should prioritize payroll in the wake of catastrophe.
  • Review tax extensions. Deadline extensions vary, depending on the tax and type of disaster, and payments aren’t necessarily included in the extensions.

Some disasters come with little to no warning, but a business with a preparedness plan can help mitigate total devastation and be better positioned to serve their community well. Share your plan with your employees and remind them to review the plan often. Consulting with your financial advisor in this capacity is also a good idea as business situations and tax laws change regularly.

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