Which financial statement report is best for selling your business?
When you prepare financial statements, the level of reporting you choose should match your goal — internal use, securing financing or preparing for a sale. CPA firms offer three levels: compilations, reviews and audits, which differ in depth, cost and the assurance they give investors, lenders and buyers. A cover letter on the statements indicates which engagement was performed.
1. Compilation — the simplest and most affordable level; the firm prepares a basic income statement and balance sheet from your bookkeeping, not in full accordance with GAAP, with no cash flow statement or notes; often called Notice to Reader (NTR); provides no assurance, so it suits internal reporting or tax rather than significant third-party investment
2. Review — a more thorough process providing moderate assurance; the accountant performs procedures to understand operations and internal controls and the statements must comply with GAAP, though there is no fraud testing; suited to medium-sized businesses seeking moderate funding; costs more than a compilation but less than an audit
3. Audit — the most comprehensive and expensive level; an in-depth examination of records, internal controls and processes, including verifying transactions with third parties and testing for fraud, prepared in strict accordance with GAAP; required for public companies and preferred for large investments, acquisitions or mergers
Which is right for you? It depends on business size, growth stage and stakeholder needs. Small or early-stage businesses may find a compilation sufficient; growing businesses seeking financing or preparing to sell should consider a review; larger businesses or those planning an acquisition should opt for an audit. Because buyers and investors often require reviewed or audited statements, begin transitioning at least three years before a planned sale.
Key facts: financial statement reporting for a business sale
Three CPA reporting levels: compilation, review, audit — increasing depth, cost and assurance
Compilation: cheapest, no assurance, internal/tax use, not full GAAP (Notice to Reader)
Review: moderate assurance, GAAP-compliant, no fraud testing, for moderate financing
Audit: highest assurance, full GAAP, fraud testing, required for public companies and large deals
Preparing to sell: reviewed or audited statements are often required — start about three years ahead
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.
