Multimedia | Advisor's Edge, episode 2
How effective financial reporting builds a platform for PE acquisition success
May 20, 2025 · Authored by Suzanne Bain, Royce Prude
Baker Tilly and CFO Dive bring you this podcast series designed for companies evaluating private equity opportunities.
Thinking about a private equity (PE) acquisition? Preparation is everything—and that’s where the Advisor’s Edge podcast comes in. In this limited, three-part series, Baker Tilly advisors walk business leaders and finance professionals through the essential steps of the PE acquisition journey.
In this second episode, Suzanne Bain and Royce Prude discuss the importance of effective financial reporting for portfolio companies preparing for a PE transaction. This process complements transaction readiness and due diligence by addressing issues before a company joins the PE firm’s portfolio. The financial reporting team ensures best practices and audit readiness. Listen in to learn how portfolio companies can work with third-party professionals to achieve success.
Other episodes in this series
How outsourced accounting creates excellence in PE portfolios
This episode discusses the benefits of outsourced accounting for PE firms and their portfolio companies.
Laying the financial groundwork for PE acquisition
This episode shares the crucial role of financial planning and due diligence in preparing companies for acquisition by private equity firms.
This episode's advisors
Royce Prude
Royce is a principal in the middle market advisory services practice of Baker Tilly.
Suzanne Bain
Suzanne Bain is a principal with Baker Tilly’s CFO advisory services practice.
Danny Bradbury:
Welcome to our podcast series Advisors’ Edge with Baker Tilly. Today we'll be talking about the role of financial reporting in preparing candidate portfolio companies for a seamless transaction during the PE acquisition process. Now, this is a critical part of the workflow because it applies strong technical accounting work to address any issues that have surfaced during the initial transaction readiness and due diligence phase. So joining us today are Suzanne Bain and Royce Prude. I'm going to let them introduce themselves. So Suzanne, maybe you'd like to go first?
Suzanne Bain:
Absolutely. Thank you, Danny. Yeah, so Suzanne Bain. I sit within the consulting practice, specifically CFO Advisory of Baker Tilly. I'm located in the Dallas markets and we focus on office of the CFO supporting that office. And a lot of our projects relate to companies that have recently been acquired. So very relevant to what we do.
Danny Bradbury:
It's very nice to have you here, Suzanne, and thanks for joining us. And Royce, we have you on the line as well. Could you introduce yourself, tell us a bit about what you do.
Royce Prude:
Yeah thanks, Danny. So I am Royce Prude, principal in our CFO advisory practice with Suzanne and just like she mentioned, anything that touches the office of the CFOs where we really hit our stride. And that looks like a number of things. It could be audit preparation, it could be transaction readiness, technical accounting, work system implementations, and just being helpful to the office of the CFO. So we'vegot a great number of team members that help us execute that all across the US and both Suzanne and I are based in Dallas, Texas.
Danny Bradbury:
Excellent. And just to be clear, are you dealing with CFOs in acquiring companies or inquiries or both?
Royce Prude:
It's both really. It's a CFO that has a need, and it could be bandwidth help, could be preparation for a transaction on the buy or sell side. You still have your day-to-day jobs. So we do a ton of work. I think majority of our work, Suzanne, is with PE-backed companies or companies that are on the sell side looking to go to market to then bring on a private equity partner. There's all kinds of needs that go with that.
Danny Bradbury:
Excellent. So lots of busy days for you guys, I imagine. Well, let's dive into things then. So Royce, maybe you can begin by explaining the role of financial reporting in this PE acquisition workflow, and what are the deliverables from that process?
Royce Prude:
Well, maybe we start with the sell side. So if I'm the seller going through a private equity transaction, where do the financials and the reporting come into play? Well, number one, you're going to go through diligence. So on the pre-transaction side, you're likely going to do your own diligence on financial statements. You're going to hire a CPA firm to review your financial statements, and that's the balance sheet income statement on a very granular level. Now, you may be cash basis - if you're a mom and pop or a closely held business with a few owners - you likely are in a cash basis or modified basis, which is different than accrual accounting and gap accounting that your private equity partners and banks and lenders will want to see. So there's a significant amount of work on your financial statements to get ready for a transaction. And that's best case if you're doing that work ahead of time.
And on the opposite end, private equity transactions most likely going to incur debt. And as part of going to lenders, the private equity firm is going to require audited US GAP financial statements, and that includes your balance sheet, income statement and cashflow. And you'd be surprised how many times we connect with owners of businesses pre-transaction that are like, I don't even know what that is. There's a number of pronouncements that have come out, technical accounting that needs to be done. It's not an insignificant effort, but those financial statements are important post-close, having a handle on those financial statements pre-close, and then quickly executing on your covenant, you're going to have, with your lenders post-close, you're going to have deadlines to meet quarterly. And so those are really important to make sure the bank and lenders and others feel comfortable about the results of the business that they acquired. So those financial stands are really the cornerstone of the reporting. And then there's non-financial metrics that go along with board reporting and MD&A management discussion analysis, but financial statements are critical to have correct and inspire confidence in the investment post close.
Danny Bradbury:
So Suzanne, it sounds like a lot of these companies need help. There's going to be some kind of lift involved in getting them to the point where they're ready for a PE transaction. Could you talk about the kinds of problems you can help address in these companies that don't have effective financial reporting?
Suzanne Bain:
Absolutely. Kind of piggybacking on what Royce was talking about is that one of the biggest challenges they have is audit readiness and having financial statements that are on a gap basis. A lot of these are small companies that they've never been through an audit before, they've never had a reason to have GAP and financial statements. So we will come in and we can help them convert from cash to accrual, GAP based, also help navigate the company through their first year audit process. So not only on the front end, helping them develop reconciliations and supporting schedules for the auditors, but also helping sometimes as a liaison between the client and the audit firm. So in addition to that to get them compliant with GAP, a lot of times they don't have standard processes and procedures in place, so we'll help develop those in accordance with GAP. We also oftentimes will help implement those with the client and perform training sessions with their teams, so they can learn how to be compliant with those policies and procedures.
Danny Bradbury:
That's interesting. Yeah, I guess a lot of these companies probably develop organically. There's not necessarily a playbook for their accounting. When you bring this level of standardization to the table, Suzanne, explain what kinds of things you might have to standardize, what kinds of processes you have to lay down for them.
Suzanne Bain:
A good example would be revenue recognition. So say they were on a cash basis, so in order to make sure they're capturing that information, in order to recognize it properly, we can look at that process from beginning to end and help them develop procedures in order to recognize it efficiently, effectively, properly, all of that. So we'll examine their current processes, determine what they need to do to be GAP compliant and help them implement those processes.
Danny Bradbury:
Right. And you mentioned training as well. Is that something that requires a heavy lift? Do employees in your opinion generally have any awareness of this stuff or is it pretty much zero to 60 for training?
Suzanne Bain:
It really varies company by company. A lot of times they're very set in their ways is what we'll see. Because like we talked about, there are companies that never had reporting requirements before on a GAP basis, and they're kind of set in their ways. So it varies significantly. But a lot of times we see that it's a lot of change management and really getting in there and helping them understand that, hey, while you've done it this way in the past, this is the new process and this is why it's important. That's another key component, is here's why it's important. Here's how it's going to make things easier and better in the future for meeting your reporting requirements.
Danny Bradbury:
I guess that's a really important part of it, isn't it? Because a lot of people, especially if they're not at senior executive level, they might not necessarily have the motivation. They're probably worried about an acquisition to begin with, they're worried about their own position, you probably get some pushback from people, but if they understand why they had to do these things, then maybe it makes things go smoother. It's not just how, it's the, motivation behind it, I guess.
Suzanne Bain:
That's a great point, Danny. And so we really partner with our clients and show them that we're there to support them and like you said, just really explain why it's important and help 'em make that process easier for them.
Danny Bradbury:
Great stuff. Okay. Now you've mentioned GAP a couple of times, both of you. I understand that there are other, different kinds of accounting that you also bring to the table to achieve your goals here. I've heard of Capital true up, historical. Could you Royce describe these things and how they compliment each other and GAP accounting?
Royce Prude:
Sure. And if you have the three different types of, we'll call them reporting bases, you've got historical accounting, you've got a networking capital True Up, you have Go Forward GAP, they all compliment each other. But the question is how, and maybe just dig into 'em a little bit more. So historical basic accounting is basically just how the company's been maintaining its booking records up to date of close. It may be a mix of GAP and not some cash basis. We call it a modified cash basis because there may be some components that may resemble GAP. An easy way to kind of describe that view is if you receive cash for a contract that's maybe two years in length, instead of recording everything day one, maybe you're spreading it out on some metric over the period of the contract, which would kind of be a modified cash basis.
But really historical is just how the company's been maintaining the books because it's important to have that distinction because something's not going to just magically change overnight. You've got a number of things that you're going to implement to get GAP ready. So historical is just up until a potential close.
Now, the Networking Capital true Up basis in a private equity purchase agreement, there's often this concept of networking capital companies are buying each other off a multiple of EBITDA in a lot of ways. EBITDA is an income statement basis that doesn't capture cash, the receivables and payables you have on your books, that you've already earned on that income statement. We do see a lot of cash free debt free deals. So that takes out each of those components. The buyer would pay the seller for the cashes on the books and no debt would carry over from Oldco.
But Networking Capital, True Up just says in a quality of earnings that you do this diligence leading up to close, you have current assets and current liabilities. Is that current assets minus current liabilities, which is working capital, did we leave enough working capital on the books for the company to be okay and successful and manage the same level going forward? Like we're not taking all the AR and AP out of the books, so the company NewCo would have to inject a bunch of cash. Now, the reason why networking capital is a separate basis, because it only includes those specific accounts, like cash receivables, prepaids, AP accruals, those may be described very differently than how GAP or the way you've done it in the past. It's often a negotiation point, like you're saying, you've got a 12 month historical average that you're using versus an actual balance or a methodology of calculating. So that's an agreement defined metric and basis. It's very contractual.
And then you have the last of the three, which is your GAP go forward and GAP, to Suzanne's point, it includes there's some significant revenue recognition changes that have happened in the last couple of years along with lease accounting. You also have different components of capitalization of software and intangible assets. So it's a completely different basis of things, that may or may not have been done or present at time of close or up to. So you have kind of these three different bases that all kind of need to be balanced and accounted for separately to meet either contractual requirements, understanding with how the business has performed historically, or reporting on a GAP basis for your lenders and investors going forward.
Danny Bradbury:
It sounds like a really complex process Royce, especially if you're having to go back and examine some of this stuff retroactively. So I imagine there are probably some challenges involved that companies might not expect. So what common hurdles have you noticed cropping up during the financial reporting phase?
Royce Prude:
You're right, it's very complex and often very contentious if you are on the sell side and you are reporting a certain way, you think that that's the correct way in most scenarios, and then all of a sudden there's a new way. The challenges that come up are just the understanding of those three bases, laying those out way up front, so it's not a surprise post-close that there is a different way of presenting, or a different way that they're going to be graded post-close. Like if I have an earnout as a seller built into the agreement, if I can't understand how revenue or my bonus is calculated and it's a different basis than before, I'm going to be shocked. And it's already defined in the purchase agreement. So hurdles that come up are misunderstanding, you've also got bandwidth. So do you have the appropriate amount of resources to record these things and make sure that they're timely and accurate versus doing cleanup way after the fact.
Danny Bradbury:
Do you have stories of how bad it can get? I'm just imagining that you can probably go to some of these companies and they've got everything written on the back of a cigarette packet for the last 10 years. How bad does it get and how much work does that make for you?
Royce Prude:
It could get pretty bad. Your books could be as messy as you can believe, but if you're good people and go to work with, we can get through pretty much any issues. And if you think about it, your accounting records are based on your bank statements. Everything else would be non-cash related. So we can always go back and look at bank statements. But the biggest issue I see in the three bases here is where could get messy is this networking capital, true up concept. In most purchase documents, there's a period of, we'll say 90 days where the buyer takes the first stab, and then they present what they think is right, send it to the sellers. The sellers have 60 days to look at it, agree, disagree, and if those definitions weren't clearly defined, which we've seen, then that becomes contentious. And then if that's not agreed upon, there's often a third party that's neither side's accountants that have the knowledge of the transaction, have been involved for a long time and they make the decision.
Hopefully it doesn't get to that point, but it has, and it just creates some friction early on in a new relationship. You've just built this relationship with these private equity partners. The last thing you want to do is have a disagreement on accounting methodology, appear that there's some hostility or hiding things. I think both sides often are just the misunderstandings there. There's nothing really nefarious going on. It's just a clear understanding and defining of the definitions, which sounds really basic, but it's really important to have an example in the purchase agreement of the calculation, the exact components. If it's recording based on invoice, like if we're recording revenue based on when we invoice, that's stated, otherwise the third party may say, well, maybe it's based on GAP because it wasn't stated otherwise in the purchase agreement. So that's the worst it could get is just get really contentious and start off our new relationship on a bad foot.
Danny Bradbury:
I’m kind of of hearing that it's not just accounting skills. There's all kinds of skills that an accounting team needs to make sure this runs smoothly and that all parties are happy. So it almost sounds like marriage counseling to a certain extent, where you're making sure that there aren't any misunderstandings, everyone's communicating properly. So what kinds of skills does an accounting team need to do this effectively, Suzanne, and what does Baker Tilly bring to the table to ensure that this flows smoothly?
Suzanne Bain:
Yeah, absolutely. One of the most important skills necessary is around technical GAP accounting, understanding how to account for transactions properly, so ensuring that the acquisition was properly accounted for that new accounting standards are properly accounted for. And if they don't have that knowledge, we can come in and we can help them with that help prepare those calculations related memos to support that. Really important to have that knowledge. Another one would be just understanding the importance and how a financial audit works to make sure that it runs efficiently. Oftentimes the best way to have that knowledge is having that public accounting background. Having the skills that come from that and understand the importance of reconciliation, supporting schedules, what needs to go into that, what's necessary and what the auditors are looking for. If the client doesn't have that skillset, we can help navigate them through that. We can help train them and help make sure that that audit runs efficiently.
Danny Bradbury:
It also sounds as though that there might be some softer skills too. Just based on what Royce was saying about potential pushback and misunderstandings and communication issues, it's probably quite a tense time for everyone. Suzanne, could you talk about some of the softer skills that an accounting firm needs to bring to the table?
Suzanne Bain:
A lot of it revolves around being empathetic and being able to explain the importance. When a client understands why something's important, it can really make a difference. So having that skillset to put the client at ease to know that, Hey, we're not here to eat up more of your time. We're not here to take your job. We're here to support you and to help make things easier for you. That's a very, very critical component of what we do.
Danny Bradbury:
Yeah, I'm also thinking about attention to detail and the ability to be proactive because it kind of sounds Suzanne, as though a lot of the problems might not surface themselves straight away. You might have to go looking for them. You might have to, if you identify that there could be a miscommunication as Royce said, go and talk to a third partly about things. But to what extent is this? Does this involve taking a really proactive approach and making sure that you find and fix every detail in the reporting process?
Suzanne Bain:
A lot of it around the planning process checklists and teaching the client. A great example would be around the close process, month end, close and reporting. Having that skillset and knowledge to know that, hey, we've got to be organized, we've got to have the checklist, we've got to be proactive, we've got to think ahead about potential fire drills or challenges that are out there. So it's really important to have that skillset and know to be able to look for that. So as we talked about earlier with the PE firm and not just around bank reporting requirements, the timeliness and accuracy of reporting is extremely important. And if there's not procedures in place on a month-end basis or quarter-end basis, year-end basis for reporting to make sure that it is accurate and streamlined and running smoothly, it can cause a lot of challenges. That mindset and understanding the importance of that is extremely important.
Danny Bradbury:
Excellent. Thanks for that, Suzanne. And Royce, maybe the last question should go to you. It sounds like there are some things that portfolio companies should do then to prepare themselves before they begin this process. It sort of sounds like they need to play a part in their own success before they even come to the table here. So can you outline some of the best practices they can follow to ensure that everything goes well?
Royce Prude:
Happy to. And as we're sitting here talking, I'm thinking about speed is such an important component of how all this happens. If you think about a good negotiation as soon as parties agree to something, which may look completely different than the day before you really hope to strike while that iron's hot and get those components documented and purchase agreement and executed. Often, it's hard to do that if you don't have a good team around you managing those details accurately and timely. And it's a stressful time. So the things to think about and prepare themselves before this process, one of the best things you can do is get an audit before you go through a transaction, and maybe it doesn't look like an audit, maybe it's a quality of earnings. Both of those activities dig into your financial statements on a pretty intense scrutiny level to the point where you're really having to support and understand your business - not that companies don't, but you have to put a little more infrastructure around the accounting and finance team.
For instance, if you're going to populate a data room, which you're definitely going to have to do if you're going through a private equity transaction, that's not going to include just finance. It's going to include legal, HR, and all the components that surround a business and the CFO and the office of CFO is going to manage a lot of that. They're going to be the quarterbacks getting that data, making sure it's provided, and you've likely engaged in an investment banker. The more you can do to get those things ready, to get organizational docs from legal, your policies and procedures from an HR perspective, accounting policies and procedures so it's clear if you weren't sitting next to someone, they could understand the why you do things the way you do in your financial statements. All that leads to really good preparation and just quick execution. There's less questions around the why and maybe the how you execute your business, and how can we partner together to get synergies, and do I have a really good understanding of my employee population, how we can interact? Those discussions are attractive to private equity partners because they can get in and make a difference sooner than later. So I wouldn't worry about hiding financial statements, or trying to indicate that there's not enough data. I would provide it all, have it all cleaned up and ready to go. Best practice would be to make sure you've got all of your data clearly together, you've gone through it, maybe you've hired an advisor to go through it, you still have your day job to do during all of this. would recommend bringing an advisor on board from helping you through the process and navigating it like Baker Tilly.
And then I would just say understanding the speed and intensity, it's a roller coaster. There'll be days when you feel really good about the transaction, and then there's days that you feel like it's going to fall apart. It happens in every transaction. And if you have that mentality going into it, you kind of know what to expect. There's a lot that'syns going to get thrown at you. You're going to have deal fatigue. But on the other side of it, you're going to have a great partner that you've vetted and feel really good about, and you've got a good strategy that you've really nailed down in these discussions to go forward and grow your business even more.
Danny Bradbury:
Excellent. Okay. So yeah, businesses that want to be acquired, take note. I guess part of this is down to you, it sounds like, and the more that you can bring to the table and prepare advisors to help, the better.
Thank you, Suzanne Bain and Royce Prude for joining us today. This has been an excellent discussion, and thank you for listening to this explanation of how effective financial reporting can get companies into a robust position for a PE transaction. Join me next time where John Heyde and Alexandra Missildine discuss the importance of outsourced accounting to support an ongoing PE portfolio company relationship.
