As advisors to sellers of middle market aerospace and defense companies we frequently have clients who do not have audited financial statements. Audited financial statements are preferred because they provide potential buyers with the highest level of assurance that the financial results of a company that they may be interested in buying are indeed correct. The reality, however, is that often privately owned middle market A&D companies do not have audited financial statements. This occurs because a company’s focus has been on other priorities such as product development, growth, customer cultivation, etc., and less so on the nature or quality of the company’s financial results. So, the question then is, what are the alternatives?
An acceptable alternative to having fully audited financial statements is reviewed financial statements. While reviewed statements do not have the full assurance of compliance with Generally Accepted Accounting Principles (GAAP), they are performed by third party CPAs and are frequently accepted by the potential buyers of companies. Reviews are effectively an analysis done by the CPA to examine your financial processes and procedures and a report is issued that indicates that your financial statements are compliant with GAAP accounting principles.
Frequently, Alderman and Company recommend also having a Quality of Earnings (QofE) analysis performed by a qualified third party. We discuss the concept of QofEs in our Deal Note® 97 (December 12, 2023)
Another alternative to not having audited financial statements is the credibility and professional credentials of the selling company’s CFO. While this is not often found, we have had clients whose CFO is a CPA and has worked at the partner level at respected audit firms during his or her career. Most buyers have a deep respect for these kinds of credentials, and this will add to their confidence in the accuracy of the seller’s financial statements.
In summary, if you are considering selling your middle market aerospace and defense company in the future, it is always best to have audited financial statements. However, as noted above, there are viable alternatives if you do not.
Have a great day.
Bruce Andrews
Managing Director
