Written by Abraham Finberg, CPA and Simon Menkes, CPA
Great news! A publicly traded company from Canada through a reverse merger (whatever that means) wants to buy you out. All they need are your audited financials! Now what?
Of course the only audits you ever had were sales tax audits. Weren't they a blast! Your accountant tells you are “not auditable” and the buyer gives you a look like what's wrong with your company. What do you do?
Let's figure out what an audit means and how you can make your company auditable.
A financial statement audit is a CPA giving their opinion your numbers match what actually occurred. An auditor is going by the simple equation that we accountants haven't changed since the Medicis in the 1500's: Cash In – Cash Out = Cash and other Assets on Hand. The auditor reviews your records and then tests your numbers to develop their opinion about the accuracy of your financial statements.
Traditionally an auditor would start by comparing your bank activities to your financial statements. Obviously in this industry that's not going to work. Auditors that understand the industry will know that and will use other testing measures. They will do things like get a list of all your vendors and contact the larger ones to confirm you actually bought what you listed on your books. So, you'll need such a list.
They'll be examining your sales system, so the more well-documented and thorough it is (ideally a POS system), the better! Hand-written guest checks don't cut it. They'll be counting your cash and inventory, both of which should match your accounting (right?!)
They'll be taking a look at payroll and other expenses, as well as the agreements you have with any investors. These need to be written, not handshakes, and available for review.
Now you need to ask yourself an important question. Do you actually have all the data listed above? If the auditor counts your vault cash, will it be lower than your sales minus expenses? For many organizations in the industry the painful answer will be, no, the necessary data doesn't exist.
Cleanup - Spend one year keeping records with a controller (a fancy name for the head accountant in your company) and then sell the company.
Sell the license and Brand - Rethink what you are selling; is the company actually interested in how much cash on hand you have? No, they want your license and your customer base (i.e., your branding). Some cities will allow you to transfer a license to another company. Maybe it would be easier to just create another company and transfer the license and the branding. The books will be very easy to audit; the main items audited are whether the new company actually has the rights to the license and the California-created trademark and service mark.
Sell privately - And finally, you may decide to sell to a private company, one that won't need audited financials. Private investors will do their due-diligence, but they are often willing to go with a certain amount of gut instinct, something a publicly traded company is rarely able to do.
Whatever the case, these are interesting times we're in. Hold onto your hat!