Internal Business Audit: Preparing Your Business for Sale
Selling a business is a significant milestone, and conducting an internal audit can help you maximize its value and attract serious buyers. A thorough internal audit can be the difference between a successful sale at premium value and a prolonged, undervalued transaction. The internal audit functions as a review of the business’s financial, operational, and compliance health, but it’s different from an external audit in several ways. As you prepare to exit your business and list it for a sale, consider the critical role that the audit plays in risk assessment and what it means to stakeholders.
Understanding Different Types if Business Reviews
A thorough review of your business involves looking at both your books and your operations. Basic financial reviews ensure your numbers are accurate and you’re following proper accounting practices. But when preparing to sell, you’ll want to go deeper—examining how your business actually runs day to day.
This broader review should look at:
- How efficiently your business operates
- Where your main risks and opportunities lie
- How well your processes and systems work
- Whether you’re following all necessary regulations
You can conduct these reviews yourself, or get help from your accountant, business advisor, or other professionals. The goal is to spot any issues that might concern buyers and fix them before putting your business on the market.
Buyers will carefully examine every aspect of your business (their “due diligence”) to assess its health and potential. Having already reviewed and improved your operations shows buyers you’re professional and gives them confidence in your business. It also helps you identify and address any problems early, avoiding surprises during sale negotiations.
Internal Audit Checklist
- Gather and review financial statements, tax records, and bank statements.
- Verify legal compliance, contracts, and regulatory adherence.
- Assess all business processes, operational systems, workflows, and efficiencies.
- Analyze market position, competition, and growth opportunities.
- Evaluate customer and vendor relationships, including contracts and dependencies.
- Ensure accurate employee records, contracts, and benefits documentation.
- Conduct thorough asset verification, including inventory and property records.
Financial Audit Areas
A financial audit reviews your business’s monetary health and transparency. The internal audit team focuses on several areas of note.
- Financial Statements and Records: Reviews the accuracy and completeness of balance sheets, profit and loss statements, and cash flow statements.
- Tax Compliance and History: Inspects tax filings for accuracy and looks to resolve any discrepancies or outstanding issues.
- Cash Flow Management: Evaluates cash flow, checking for liquidity and sustainable operations.
- Inventory Systems: Verifies the accuracy of inventory records and valuation methods.
- Accounts Receivable/Payable: Checks the aging of receivables and payables to maintain financial clarity.
- Financial Controls: Assesses internal controls and procedures to prevent fraud, detect errors, and ensure accurate reporting.
- Expense Tracking and Revenue Recognition: Confirms accurate recording and categorization to reflect true profitability.
Operational Audit Areas
An auditor or internal audit department focuses on efficiency, productivity, and organizational readiness in specific areas.
- Standard Operating Procedures (SOPs): Makes sure documented workflows align with best practices for business operations.
- Employee Documentation: Verifies employment contracts, job descriptions, and performance records.
- Training Materials: Assesses availability and quality of employee development resources.
- Equipment Maintenance Records: Reviews logs for operational reliability and preventative maintenance schedules to minimize downtime and demonstrate proper asset care.
- Vendor and Customer Contracts: Confirms validity and alignment with business objectives.
- Quality Control Processes and Systems: Audits the effectiveness of internal controls for maintaining product or service standards.
- Technology Infrastructure: Evaluates systems for scalability, security, and efficiency.
Legal and Compliance Audit
A legal audit protects against liabilities and ensures a business adheres to regulations in various areas.
- Corporate Records: Reviews bylaws, meeting minutes, and ownership documents for accuracy.
- Licenses and Permits: Verifies validity and renewal of necessary permits and certifications.
- Insurance Coverage: Confirms adequate coverage for liabilities and risks.
- Employee Agreements: Makes sure contracts and NDAs are up-to-date and compliant.
- Intellectual Property: Protects trademarks, patents, and copyrights through proper documentation.
- Lease Agreements: Examines terms of property and equipment leases for consistency.
- Environmental Compliance: Addresses any regulatory requirements related to waste management or sustainability.
Preparing for Buyer Review
Presenting your business as an attractive investment takes careful preparation and attention to detail. Showing professionalism throughout the process helps build trust with potential buyers. They will look closely at financial stability, operational efficiency, legal compliance, and growth potential before committing. Common concerns include inconsistent financial records, unresolved legal issues, and dependence on a few key customers or vendors. Addressing issues and implementing corrective actions based on audit findings can make prospective buyers feel more confident.
Organizing documentation is an important part of this. Prepare key documents like financial statements, contracts, operational workflows, and employee records in a structured manner. A virtual data room (VDR) is an excellent tool for securely storing and sharing these documents with interested parties. Set up the VDR with clearly labeled folders to make it easy for buyers to find what they need.
Implement strict access management and confidentiality protocols. Only allow authorized individuals to view sensitive information. Require non-disclosure agreements (NDAs) to protect sensitive information during the review process.
Preparation Timeline
Selling a business takes time. Consider what goes into an audit, and backtrack your timeline from there.
A successful business sale requires careful planning and preparation. Here’s a recommended timeline to ensure you’re fully prepared.
Begin monitoring market conditions and industry trends. Evaluate your company's market position and start implementing changes to strengthen revenue streams. Establish strong SOPs and workplace culture that can operate without owner involvement.
Switch to accrual accounting if needed. Expand and diversify your client base to reduce customer concentration. Identify and develop key management for succession planning. Document operational procedures and systematize processes.
Clean up financial records and ensure P&Ls match tax returns. Review and optimize expense management. Begin calculating your SDE (Seller's Discretionary Earnings) and develop tax strategies with a CPA.
Conduct professional audit. Complete management transition plan. Gather three years of clean financials for SBA lenders. Assess if market timing is favorable for your industry and goals.
Set up virtual data room and organize documentation for due diligence. Finalize business valuation based on SDE and industry multiples. Begin confidential outreach to potential buyers or engage with business broker.
Ready to Take the Next Step?
If you're 3+ years from selling: Start your exit planning journey by connecting with an experienced business broker. They can help you identify what needs to be done to maximize your business value and guide your preparation.
If you're ready to sell: Your business preparation is complete and you're ready to find the right buyer? List your business for sale on BizBuySell, where thousands of qualified buyers are searching.