I have now been doing M&A in the PR industry for 17+ years. Prior to that I owned a CPA firm, specializing in PR firms. When I owned my CPA firm, it was a requirement that every client have a CPA prepared Balance Sheet and P&L at their year-end, on an “accrual” basis, including AR & AP.
There was no choice. It was in our engagement letter. It was a component included in the annual budget, in the monthly retainer. To me it was logical. The financials are used for management analysis, for industry benchmarking, for bank lines of credit, for leases, for estate purposes, for partner buy-ins, and buy-outs, for valuation to know what your firm is worth.
So why, in the last week, have I had two situations with seller firms retaining our firm to sell them—only to find out that their CPA firm only required the books be maintained for tax purposes, on a Cash Basis, with NO year-end conversion to accrual, with no preparation of year-end financials?
Now these firms want to sell and there is a huge amount of work to do by their CPA firm to get the financials in a format required by me to present to a buyer.
So here is my answer to the question:
- Always request year-end financials on an accrual basis. Any CPA that tells you it is not necessary is doing you a disservice. It is necessary. The type of financial will depend on the size of your firm (Compilation, Review Report, Audit).
- Use the financials as a tool. Use them for benchmarking, for ratio analysis and other best practices analytics.
- Have them professionally done and always on CPA firm letterhead.
Financial statements tell a story
They are the first item I review when a firm engages our firm to sell them.
Cash basis accounting Is fine for tax planning and tax preparation but it is useless for any financial analysis.
If your accountant tells you financials are not necessary my advice is to get a new accountant.
Rick Gould is author of “Doing It The Right Way: 13 Crucial Steps For A Successful PR Agency Merger or Acquisition,” and “The Ultimate PR Agency Financial Management Handbook: How To Manage By The Numbers For Breakthrough Profitability Of 20% Or Greater” (4th Edition).