You’ve decided to sell your company, and either the acquiring party or your advisors have announced the start of the acquisition audit (or due diligence). You’re probably asking yourself lots of questions about this crucial examination for the sale of your company. Let’s take a look at 5 essential points about an acquisition audit.
What is an acquisition audit?
The role of an acquisition due diligence is to validate the value of your company. We seek to confirm the valuation that has been set upstream during the company diagnosis, by identifying any discrepancies or additional information that may reassess the valuation of your company. Normally, if your advisors have done their job properly, it’s unlikely that your assets will be valued upwards during the audit. However, it is essential that you give a clean bill of health during this exercise, so that the potential buyer is aware of the risks involved.
This audit can be lengthy, as it will go through all your company’s accounting, financial, tax, legal and organizational information.
How much does an acquisition audit cost, and who pays for it?
The price of an audit can vary according to the experts hired, the time spent and the tools used in the operation. To find out who pays for the audit, it’s important to separate the costs. In most cases, the expert auditors will be hired and paid for by the potential buyer. On the other hand, a tool such as a dataroom to share your company’s confidential files will in most cases be paid for by you, your company or your M&A firm if it is contracted with a supplier.
Who can carry out an acquisition audit?
Everyone has their own speciality, and the experts who carry out the audit will not all be working on the same thing, even if they will sometimes need the same information.
Another important piece of information: sometimes the potential buyer may offer to use his in-house teams to carry out the review. If you accept, it’s very important to have clauses and guarantees in place upstream that commit the seller to finalizing the transaction, to avoid industrial theft.
Here is a list of experts who can be involved in the audit of an M&A transaction:
- Chartered accountants
- Statutory auditors
- Legal professionals (specialized lawyers, notaries)
- Bankers
- Specialized M&A firms
Advice: When your project is being evaluated, it’s best to have your advisors act as intermediaries between you and your partners and the buyer, to avoid any problems. They are professionals in the M&A process.
When does the acquisition audit take place?
The audit takes place after you have signed the memorandum of understanding and before closing, i.e. after you have signed the letter of intent specifying that the buyer intends to make you a proposal, which will be validated after you have submitted the diagnostic.
Even if this stage is close to closing, the examination can sometimes take a very long time, so you need to be patient. Most buyers will evaluate your entire company to make a diagnosis of the actions to be taken to purchase or renegotiate the price.
What documents do I need to carry out an acquisition audit?
The acquisition audit approach focuses on several areas: the financial, social, tax, commercial, legal and operational health of the company (and increasingly, its environmental impact). So it’s not just an assessment of the target company’s financial health.
Here is a list of the documents required for an audit:
- Historical financial statements: balance sheets, income statements, cash flow statements and consolidated financial statements.
- Commercial contracts and agreements: sales, rental, service and other relevant commercial agreements and contracts.
- Physical and intangible assets: inventories of assets, patents, licenses, trademarks and other intangible assets.
- Strategic planning and market data: development plans, marketing plans, production plans, market studies, competitor analysis, etc.
- Legal and regulatory documentation: tax documents, personnel files, etc.
Caution: Depending on the stage of the audit, the experts do not need to have access to all your documents. It is therefore important to properly partition access rights in your dataroom.
Occasionally, the auditors may ask you for additional documents or information that have not been provided beforehand.
How to Prepare for an Acquisition Audit?
Preparing for an acquisition audit is critical for both the seller and the buyer. This process requires meticulous planning, organization, and clear communication to ensure a smooth and effective transition. Here’s a breakdown of how each party can prepare for an acquisition audit.
For the Seller
As a seller, preparation is essential to ensure a comprehensive and transparent audit process. Here are the critical steps to prepare for an acquisition audit:
1. Gather an Audit-Readiness Team
Form an internal audit readiness team made up of key personnel, including financial, legal, and operations experts, to manage the audit. This team should have a clear understanding of accounting standards, reporting requirements, and the company’s compliance with Generally Accepted Accounting Principles (GAAP) or other regulatory standards. Having a dedicated team helps in maintaining consistent communication, organizing required documentation, and addressing any queries promptly.
2. Document Breakdown and Organization
Clearly define and list all necessary documents that auditors will need to assess, from financial statements and commercial contracts to legal documents. A structured breakdown of these documents helps streamline the process and reduces the risk of missing critical items, such as asset inventories, contract terms, and financial positions.
3. Dataroom Setup
Establish a secure dataroom—using a system like Timeref—as a centralized repository for audit documents. This provides a clear timeline of shared information and ensures audit-ready compliance. Timeref’s functionality seals documents, activity logs, and Q&A for up to five years, enhancing accountability and providing transparency for both parties involved.
4. Interdepartmental Exchange with Buyer’s Team
Maintain regular contact with the buyer’s audit team to clarify requirements, answer questions, and provide additional documents as requested. A proactive exchange ensures that both parties stay aligned and any documentation discrepancies are identified early.
5. Phased Document Sharing
Instead of sharing everything at once, gradually release documents in stages according to the due diligence progress. This allows both sides to assess, evaluate, and adapt the process as required, ensuring effective risk management, reducing the likelihood of overlooked details, and addressing issues as they arise.
By proactively addressing these areas, sellers can facilitate an efficient audit process, build confidence with the acquiring company, and reduce potential delays, helping to ensure that the acquisition proceeds as smoothly as possible.
For the Buyer
Buyers need to approach the acquisition audit with a structured and diligent mindset. Here’s how they can best prepare:
1. Assemble an Evaluation Team
Form a team of experts, including financial analysts, legal advisors, and internal auditors, to conduct a comprehensive review. This team should be skilled in identifying key business risks, understanding compliance needs, and evaluating the target company’s financial position. By gathering the right team, buyers ensure a thorough assessment and enhance audit quality.
2. Identify Target Areas for Evaluation
Define the specific aspects of the company to be audited, such as financial reporting, legal standing, and operational efficiency. Buyers should focus on critical areas such as tax compliance, contract obligations, and the robustness of internal controls, ensuring that the audit covers all essential areas of the company’s performance and health.
3. Request Enhanced Access Based on Progress
Depending on audit progress, request additional access to documents or specific departments. If the initial review raises questions, seek further information from the seller to clarify and verify findings. This adaptive approach allows buyers to address issues immediately, minimizing potential future risks.
4. Use Timeref to Secure Post-Acquisition Data
With a secure dataroom like Timeref, ensure that all shared documents and activities during the audit are sealed upon acquisition closure. Timeref’s dataroom logs are preserved for five years, providing a post-acquisition reference for compliance, tracking, and accountability. This feature is crucial in maintaining a record of what was disclosed and agreed upon during the diligence process.
By taking these steps, buyers can protect their investment and make informed decisions with confidence. A systematic approach, combined with clear documentation and effective communication with the seller, strengthens the acquisition audit process and ensures a clearer understanding of the acquisition’s risks and opportunities.
Why is an acquisition audit so important?
According to an online publication by La Sorbonne, more than 50% of M&A deals fail. The purpose of the audit is to assess whether the company’s objectives can be achieved.
Now that you know when, how and by whom your company will be audited when it is sold, you’re ready to tackle this particular part. Your life’s work will be objectively analyzed by people you’ve just met. That’s why it’s so important for you, as the seller, to have your advisors on hand to act as intermediaries with the potential buyer.