We were recently approached by a new client looking to get his business valued after one of his own clients expressed interest in acquiring his company. When we requested the necessary information for the valuation, we realized that their financial statements were not audited and needed an update (old accounts, balances and practices). There were also several unfiled tax reports and some of the criteria applied to determine the company’s taxes were, to put it mildly, murky. We recommended the client delay negotiations and instead start getting his house in order to avoid the risk of receiving a reduced offer as a result of the missing information.
Engaging an independent professional auditor
Much of the problems described above could have been avoided if the company had been used to using an independent auditor to audit its financial statements. While there is no magic wand for avoiding problems like this, companies that engage external auditors receive additional consequential benefits.
The main objective of an auditor is to provide an opinion on whether the entity’s financial information is presented fairly. This professional and independent opinion is highly valued by all stakeholders, who can then make better-informed decisions based on that information. In the context of a company acquisition, it is uncommon for the buyer to accept unaudited financial information, especially at face value.
Ideally, a company’s financial statements should summarize its current performance, showing its assets, obligations and more importantly, its capacity to generate future cash flows. Buyers will always prefer to know that these have been reviewed by someone independent, who is able to confirm that the statements are sufficiently accurate to make an informed decision. This is significant as not auditing the financial statements could stop negotiations altogether until a review is completed.
Added benefits
- Companies that audit their financial statements regularly receive numerous benefits. An external auditor will not limit his or her review to the financial information. They will also look at the company’s compliance with various obligations, including tax, labor, social security and corporate requirements.
- The company’s level of internal control is automatically increased as everyone at the company becomes more vigilant knowing that their work may be reviewed. Employees keep their work on time and in most cases, welcome the auditor’s presence.
- Regarding taxes, the auditor’s examination will confirm correct compliance. If any mistakes are found, the company will have a chance to correct them therefore avoiding unnecessary risks and further costs or penalties.
- Auditors become valued advisors to companies. They get to know the company’s objectives and performance. They have to assess its processes and will be able to recommend best practices that promote long term sustainability.
- Companies with audited financial statements reflect a more stable, mature organization. Its corporate governance will improve, sending the right message to all stakeholders. For example, these companies gain better access to financial support, as banks prefer clients who are willing to put their financial information under the scrutiny of an objective independent professional.
At TGS, we understand that our clients’ well being will ensure a long term business relationship in which we can grow together. Having a professional auditor by their side enables companies to seize opportunities, such as becoming more attractive in an acquisition. These opportunities do not arise on a daily basis so it is better to be ready than missing out or, far worse, losing value in the acquisition negotiations. Selling a company represents harvesting the benefits of long work. Best practices, such as auditing the financial statements, help maintain that value.
Horacio ROCHA
Partner – MEXICO
