Why Focusing Early on Due Diligence and Audit Preparedness is Critical to a Successful Exit

Owners and CEOs often don’t think about due diligence and audit preparedness during the early stages of the business startup. But maybe they should.

Research has indicated that between 90% and 95% of companies that receive seed funding don’t achieve a successful exit. This raises the question: What’s the difference between seed companies that achieve a successful exit — whether this is going public or some other type of exit — and those that don’t?

Of course, one of the biggest factors is achieving the right product-market fit. But another factor that isn’t talked about as much is an early focus and emphasis on due diligence and audit preparedness, especially as the company moves through the various stages of capital fundraising.

Growth Stages and Funding Milestones

Following are some of the key steps that should be taken from a due diligence and audit preparedness standpoint for each major growth stage and funding milestone. Note that there is more complexity at each milestone, requiring greater sophistication on the part of the financial management team.

Pre-seed to Seed:

• Build your financial system and organize financial files

• Implement financial controls

• Set up collections processes to maximize efficiency

Fundraising Series A:

• Financial modeling and long-range planning

• Fundraising project plan and investor presentation

• Series A fundraising overview, current trends and term sheets

Fundraising Series B:

• Financial metrics, benchmarking and data analytics

• Annual financial planning/forecasting and cash flow management

• Board financial reporting packages

• GAAP accounting and revenue recognition

Fundraising Series C:

• Financial guidance for strategic decisions

• Merger and acquisition assistance (if needed)

• Board/investor presentations

• Potential international expansion

“The key is to maintain funding readiness throughout each of these stages,” says Jason Burke with Consero. “This should always be top of mind for seed companies. For example, make sure compliance is up to date, financial records are maintained and documentation is prepared so when opportunity arises, you’re ready to take advantage of it,” he notes. 

Get Started Early

Jason stresses that due diligence and audit preparedness should begin on day one of the startup. “It’s never too early to get started,” he says. “You’re going to need a lot of supporting information to back the numbers in your financial statements.”

He lists the following due diligence and audit preparedness steps:

• Gather formation documents such as articles of incorporation, bylaws and shareholder agreements.

• Identify and build relationships with professional service providers including a CPA, banker, attorney, insurance broker and industry-specific consultants.

ª Gather such information as internal control narratives and a summary of related party transactions.

• Prepare revenue and gross profit projections by product offering.

• Obtain audited financial statements for the last two years, or three years for a public company buyer.

• Consult with an audit firm about complex accounting requirements.

“It’s important to maintain your own financial documents and not rely on your CPA firm for this,” says Jason. “If you switch firms, important data that substantiates a tax position could be lost.”

Jason also stresses the importance of keeping financial statements in good order and maintaining adequate internal controls at all times. “Failure to do so can lead to numerous problems when it’s time to exit the business, not to mention higher taxes,” he says.

Your Finance and Accounting Team

Building a strong finance and accounting team is critical to proper due diligence and audit preparedness. This can be done internally or on an outsourced basis, which tends to be more common among seed startups.

Consero can help you build the finance and accounting team you need to assure adequate due diligence and audit preparedness. Contact us today and schedule a complimentary consultation. 

Consero FaaS: Disrupting the Outdated Traditional F&A Model

  • Cash to GAAP conversion
  • Clean-up work
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Build it Yourself Solution

  • CFO / Interim CFO
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Ongoing F&A
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New PE Platform Investment F&A Challenges

Founder Owned Company Accounting:
  • Existing accounting done on a cash/hybrid basis
  • Run on SMB accounting software and other disparate applications
  • Inability to produce auditable financials
  • Lack of know-how to develop projections & KPIs
  • No consistency/structure to customer contracts
  • Underqualified staff
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Carve-Out Accounting:
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  • Have to build an entire F&A team
  • No documented operational policies and procedures
To Optimized Finance & Accounting:
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