Will a Buyer Expect Audited or GAAP-Compliant Financials? What You Might Be Overlooking Before a Sale

As a founder preparing for a potential exit, one of the most common — and consequential — questions you’ll face is: “Do we need audited financials or GAAP-compliant statements before going to market?”

The short answer: it depends on your buyer profile, deal size, and industry. But in nearly all cases, the quality and clarity of your financial documentation will directly impact valuation, deal structure, and buyer confidence.

In this article, we’ll break down what buyers expect, when audits or GAAP compliance become essential, and which financial documents are often overlooked — yet critical — in a successful M&A process.

Understanding Buyer Expectations: Audits vs. GAAP Compliance

Let’s start by distinguishing between two related but distinct concepts:

• Audited Financials – These are financial statements reviewed and verified by an independent CPA firm, providing the highest level of assurance.
• GAAP-Compliant Financials – These follow Generally Accepted Accounting Principles (GAAP), ensuring consistency and comparability, but may not be audited.

Buyers — whether strategic acquirers or private equity firms — will typically expect at least GAAP-compliant financials. Audited statements, while not always required, can significantly reduce friction during due diligence and increase buyer trust, especially in deals north of $10M in enterprise value.

For example, in a recent $25M SaaS transaction managed by iMerge Advisors, the absence of audited financials initially raised red flags for the buyer’s board. Although the company had clean books and a strong recurring revenue base, the buyer required a third-party Quality of Earnings (QoE) report to validate EBITDA adjustments and revenue recognition policies — delaying the deal by six weeks.

When Are Audited Financials Expected?

While not every company needs an audit, here are scenarios where they’re strongly recommended or expected:

• Enterprise value exceeds $10M–$15M
• Private equity buyers are involved
• Complex revenue models (e.g., multi-year contracts, usage-based billing)
• International operations or multiple legal entities
• Prior investor capital with board oversight or audit requirements

In contrast, for smaller software businesses — say, sub-$5M in revenue — buyers may accept internally prepared, GAAP-aligned financials, especially if supported by a robust due diligence package and a third-party QoE report.

What Financial Documentation Are You Overlooking?

Even companies with clean P&Ls and balance sheets often overlook key financial artifacts that buyers scrutinize. Here are several that should be on your radar:

1. Revenue Recognition Policies

Especially in SaaS and subscription models, how you recognize revenue matters. Buyers will want to see consistency with ASC 606 standards. If you’re recognizing annual contracts upfront instead of ratably, expect pushback — or at least a downward EBITDA adjustment.

2. Deferred Revenue and Contract Liabilities

Many founders underestimate the importance of deferred revenue schedules. Buyers want to understand how much cash has been collected for services not yet delivered — and how that impacts working capital and post-close obligations.

3. Customer Cohort and Churn Analysis

While not a traditional financial statement, a detailed cohort analysis showing retention, expansion, and churn by customer segment is invaluable. It helps buyers assess revenue durability and customer lifetime value — key drivers of SaaS multiples.

4. Normalized EBITDA Adjustments

Buyers will want to see a clear bridge from reported net income to adjusted EBITDA. This includes add-backs for founder compensation, one-time legal fees, or non-recurring marketing spend. A well-documented EBITDA bridge can materially impact valuation.

5. Capitalization Table and Option Schedules

Cap tables are often outdated or incomplete. Ensure you have a current, fully diluted cap table — including all SAFEs, convertible notes, and unexercised options — to avoid surprises during diligence.

6. AR Aging and Collections History

Accounts receivable aging reports help buyers assess the quality of your revenue and the risk of bad debt. If a significant portion of your AR is 90+ days overdue, it may trigger working capital adjustments or escrow holdbacks.

7. Tax Compliance and Nexus Exposure

Especially for SaaS companies with customers across multiple states or countries, sales tax compliance and nexus exposure are increasingly scrutinized. A buyer doesn’t want to inherit a hidden tax liability.

For more on this, see our article on Tax Law Changes and the Impact on Personal Taxes from Selling a Software Company.

How a Quality of Earnings (QoE) Report Fits In

In lieu of audited financials, many buyers — particularly private equity firms — will commission a QoE report during diligence. This third-party analysis validates revenue, margins, and EBITDA adjustments. However, if you proactively prepare a seller-side QoE report, you can:

• Control the narrative around financial performance
• Accelerate diligence timelines
• Reduce the risk of retrading or valuation erosion

Firms like iMerge often recommend a preemptive QoE for companies with $5M+ in EBITDA or those targeting institutional buyers. It’s a strategic investment that can pay dividends in both valuation and deal certainty.

Preparing for Buyer Scrutiny: A Strategic Advantage

Ultimately, the goal isn’t just to “check the box” on financial documentation — it’s to present a compelling, defensible financial story that builds buyer confidence and supports your valuation thesis.

As we’ve outlined in our Exit Business Planning Strategy guide, early preparation is key. The more you can anticipate buyer questions and proactively address them, the smoother — and more lucrative — your exit will be.

Final Thoughts

Audited financials aren’t always required, but GAAP-compliant statements and a well-organized financial package are non-negotiable in today’s M&A environment. Overlooking key documentation — from revenue recognition to tax exposure — can delay or derail a deal.

Whether you’re 12 months from a sale or just starting to explore options, aligning your financials with buyer expectations is one of the highest-leverage steps you can take.

Founders navigating valuation or deal structuring decisions can benefit from iMerge’s experience in software and tech exits — reach out for guidance tailored to your situation.