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Due diligence is a crucial part of every mergers and acquisition (M&A) transaction, and executing an audit can considerably improve the buyer and seller’s status. In general, these services improve the accuracy of financial data, giving potential buyers confidence in what they’re buying. In addition, an audit increases the value of a business because the buyer is better informed about the seller’s financial situation.
Let’s take a look at why an audit is so important from both the buyer’s and seller’s perspectives.
The greatest advantage of requiring an audit, and/or the numerous services linked with audits, is that it gives the buyer more trust and confidence in the financial health of the firm they’re looking to buy. When there are uncertainties or unknowns, the cost of capital rises because the buyer may have insufficient financial knowledge.
Buyers can benefit from audits since they can assist them to price a transaction more efficiently in proportion to the seller’s economic value. They could also disclose that the company isn’t worth as much as the buyer thought. For example, the buyer may learn that the business’s worth has decreased as a result of different liabilities discovered. This would lower the company’s valuation and, as a result, the buyer’s offer.
An audit can result in a qualified opinion revealing problems with accounting policies and/or anomalies in earnings quality. A management letter can also be used to identify weaknesses in internal controls. An audit, for example, may reveal ineffective receivables collection practices. These kinds of red flags can indicate to a buyer that a business isn’t being operated properly.
It is critical for the seller to not only have an audit completed before to the sale, but to continue to employ a CPA firm for annual audits. Many buyers demand to see financial statements that have been audited for at least three years. These annual audits allow the seller to demonstrate to potential buyers that it is a trustworthy company entity with sound financial management. It also gives the seller time to fine-tune and improve its financial reporting and internal control processes.
On the other hand, if a company isn’t audited on a regular basis, a potential buyer is more likely to drop their asking price because they’ll have to do more due diligence. Buyers who see a strong set of figures and have faith in the team in place as a result of these numbers are more inclined to pay a greater price for the firm because they are given certainty.
Audits are vital not only from a valuation and/or spending standpoint but also from a time-saving standpoint. Why? The audit speeds up the transaction process by providing a level of legitimacy to the firm.
Consider this, beginning from the ground up will almost always take longer than studying the financials of a company that has undergone annual audits. Many transactions fail because the timing drags on to the point where the exercise loses its appeal or is overshadowed by extraneous occurrences.
Simply said, audits give stakeholders peace of mind and trust in their business transfer transactions. When your M&A deal is more quick, efficient, and cost-effective, you’ll be glad you took the time to conduct audits.
Alya Auditors is a well-known organization of tax, audit, business management, and business planning advisers in the UAE who proactively represent discerning, privately-held businesses and leaders.
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An association of legally independent auditing & accounting firms in the UAE
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