It’s understandable why emerging technology companies often delay conducting financial statement audits. Audits typically aren’t required, often take significant time and resources, and can distract from a company’s priorities—product development, sales, and fundraising.

Nevertheless, operating without an audit can create barriers to growth for companies of all sizes—especially in an environment where venture capital and private equity activity are increasing and more funders are willing to invest greater amounts at all stages of a company’s lifecycle.

Following are three compelling reasons why tech start-ups should invest in an audit.

Strengthen Your Negotiating Position

Early stage companies live and die by their funding, depending on cash infusions to staff up their engineering and sales ranks, build successful products, and work toward an exit. Investors look for businesses with attractive annual recurring revenue, a management team that knows how to build the company, and a strong potential for valuable ROI.

Financial Statements

For a venture capital or private equity investor taking a minority stake, an audited financial statement lends a level of credibility that goes beyond what they’ll get by looking at bookings. For buy-out or a major strategic investor, the audited financial statement is typically the point of entry.

In fact, a company positioning itself for an acquisition or major investment may need three years of audited financials once the due diligence process comes around. If financial records aren’t accurate or in accordance with United States generally accepted accounting principles (GAAP), a company puts itself at risk for potentially significant adjustments arising during the suitor’s due diligence process. A company with audited financial statements tends to incur fewer issues related to accounting records and reported balances during diligence. A smoother and faster diligence process may also increase the likelihood of the close of funding.

Companies with audited financial statements can be in a position for better negotiations and stronger outcomes—while those without could face significant barriers to exit.

Assistance During Diligence

While not in scope for the standard audit engagement, a strong relationship with your auditor lends itself to another opportunity to assist management with investor inquiries of audited financial results during the diligence process. As a knowledgeable business consultant, an existing audit relationship can be leveraged into assisting management in responding to questions related to accounting positions and results during periods under audit. When institutional funds or large strategic investors need deeper explanations, it’s a good idea to have an experienced advisor on your side.

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