First, Tidy Up the Paperwork
If you're trying to attract outside investors, you won't get far unless you've spruced up your financial statements. Keith Shaughnessy, president of Metapoint Partners, a Peabody, Mass., investment firm, says that "privately owned companies almost always have some type of operating expenses that are nonessential, like cars for family members. We want to see financial statements with those costs added back -- and fully documented -- so that we see how much it would cost us to run this business."
Shaughnessy offers another tip: "If a company's financials lack documentation or look like they've been thrown together, that's a very big warning sign of potential troubles." He advises equity seekers to hire an outside certified public accountant to do a full-scale audit before they contact prospective investors.
It's also crucial to ensure that the accounting principles -- and documentation -- that support your financial statements are defensible. Interested large investors often send in their own CPAs to conduct complete audits to verify statements or to spot red flags, such as excessively old inventory or uncollectible accounts receivable.* * *