Most finance leaders in technology companies already have a running list of items they want to address whenever time allows.
In most cases, these wish list items don’t necessarily prevent the business from operating day to day, but they are easier to manage before an auditor, investor or buyer starts asking about them. Now that AI is saving finance teams time on routine work, they can use some of that time to address these issues before they happen.
This article covers the problems I see most often in SaaS and enterprise software companies, how they complicate an audit or transaction and what companies can address ahead of time. In a transaction, unresolved issues can also affect a buyer’s view of normalized EBITDA, valuation, working capital and the protections needed to complete the deal.
Revenue Recognition Policies Don’t Match Contract Terms
One of the most common issues I see involves revenue recognition. A company may record revenue one way, but, years later, an auditor reviews the same contract and thinks it should have been recorded differently.
In these cases, prior periods may need to be revisited, and revenue may need to be reallocated among different parts of the contract. The finance team may also need to explain decisions made years earlier without the contracts, spreadsheets or other records used at the time.
Having a written revenue recognition policy provides a record of how those conclusions were reached and applied across contracts.
ARR and MRR Don’t Always Tell the Same Story as the Financial Statements
Boards, investors and management teams rely heavily on ARR and MRR, and problems arise when those numbers don’t tie back to the financial statements (especially when nobody can clearly explain the difference).
I often see ARR and MRR reporting built for internal decision making, while revenue is reported differently for accounting purposes. Both sets of numbers can be valid, but the finance team still needs to explain why they show different results and apply each calculation consistently from one period to the next.
Incomplete deferred revenue schedules can delay a close and make the balance harder to support during an audit or transaction. Rebuilding those schedules adds even more work when the finance team is already responding to other requests.
Software Development Costs Aren’t Always Treated Consistently
Similar software development projects may be accounted for differently. Costs may be capitalized for one project and expensed for another, which affects reported expenses, assets and operating results. Because capitalized costs are not reflected as a current-period operating expense, inconsistent treatment can also impact reported EBITDA and make comparisons across periods or with other companies more difficult.
During an audit or transaction, the company may need project records and employee time information to support decisions made in prior periods. Missing records make those decisions harder to support and results across periods harder to compare. A buyer may also analyze total development spending, regardless of whether the costs were capitalized or expensed, and adjust EBITDA if the spending is viewed as a recurring operating cost.
Tax Documentation Gets Rebuilt After the Fact
Companies often wait until they claim the R&D credit to pull together records of the work and related expenses. But, by then, engineers, project managers and finance personnel may be working from old project files, calendars and time records.
The company may have completed qualifying work and incurred eligible expenses. The available documentation determines how much of the credit it can support. Missing records can reduce the credit or require employees to reconstruct project details long after the work occurred.
Multistate Tax Exposure Surfaces During Diligence
Multistate tax exposure may not receive a full review until diligence. A buyer may identify filing obligations or unpaid liabilities tied to where the company has employees, customers or other business activity.
The finance team then has to determine where returns should have been filed, estimate any unpaid tax and respond to related questions from the buyer. Unresolved liabilities can delay the review or affect how the parties address the exposure in the transaction.
Financial Information Can’t Answer the Questions Being Asked
A transaction process often requires information that management hasn’t ever needed before.
Buyers may ask for revenue and margin by customer or product line. If the accounting system doesn’t capture that detail, the finance team must build the analysis manually and reconcile it with information already provided.
An inconsistent monthly close makes it harder to compare periods, explain changes in reported results and prepare clean quality of earnings reports. Management must find the correct records and resolve differences between files while continuing to answer the buyer’s other requests.
Cap Table Problems Affect Available Tax Treatment
Cap table issues can put qualified small business stock eligibility at risk. These issues may trace back to earlier funding rounds, stock issuances or incomplete records. They often receive closer review during a financing or sale, when the available time to resolve them is limited.
Management may need support from various advisors to determine what happened and what documentation exists. Some issues can’t be corrected after the underlying transaction has occurred. A review before a financing or sale gives the company time to confirm its records and determine whether shareholders qualify for the available tax treatment.
Addressing Known Issues Before They Become Problems
Thanks to AI advancements, your finance team may be saving time previously spent on manual, routine tasks. How is that saved time being used now?
Addressing these areas during normal operations can give your finance team more time to document prior decisions, correct inconsistencies and prepare information for the CEO, board and investors.
To learn more, contact your Warren Averett advisor directly, or ask a member of our team to reach out to you.
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