An efficient audit process is crucial to delivering timely audited financial statements and tax reporting, while also maintaining strong relationships with lenders, investors, and other stakeholders.

However, many portfolio companies (portcos) enter the audit process unprepared, resulting in delays, cost overruns, and missed deadlines. By taking a proactive approach to audit readiness, portcos can avoid common, avoidable pitfalls, including:

1. Understaffed Teams

Limited resources to manage both daily operations and audit demands leads to errors and delays in fulfilling audit requests.

2. Inadequate Closing Procedures

Inefficient closing processes often result in inaccurate or disorganized financial records, further delaying the audit process.

3. Lack of In-House Technical Expertise

Many portcos lack the necessary bench strength to handle complex accounting topics like business combinations, contingent consideration, debt modifications, stock-based compensation, and consolidations.

4. Insufficient Documentation for Key Audit Areas

Missing or incomplete documentation for balance sheet accounts, discrepancies with the general ledger, inaccurate or nonexistent account roll-forwards, and inadequate documentation or improper positions under Generally Accepted Accounting Principles (GAAP).

5. Disconnect Between Accounting and Deal Teams

Poor coordination and lack of support for acquisitions can delay reporting and hinder audit progress.

Audit Readiness Strategies for Portfolio Companies

Adopting the right audit preparation practices can help portfolio companies approach the process with greater confidence. The following six strategies are designed to reduce delays, lower costs, and improve the overall audit experience:

1. Start Early and Communicate Often

Engage with the audit firm well in advance of the audit to discuss timelines, scope, focus areas, and expectations. Develop a detailed audit roadmap, including key milestones and routine check-ins to assess progress, address roadblocks, and keep everyone aligned.

2. Develop a Structured Closing Checklist

A comprehensive closing checklist helps avoid last-minute surprises. Include items such as:

• Reviewing all transactions for completeness and accuracy
• Verifying that all journal entries are posted correctly
• Preparing reconciliations for bank accounts, accounts receivable, accounts payable, and other accounts
• Completing roll-forwards for goodwill, fixed assets, debt, and equity
• Eliminating all intercompany transactions
• Assembling key agreements (e.g. revenue, leases, debt, equity) and documentation for any accruals, reserves, or contingencies
• Updating tax-related matters (e.g., deferred taxes, tax provisions)

3. Prepare Easy-to-Follow Support

All support should be well organized, easily accessible, include necessary checks, and provide clear explanations for significant fluctuations and/or unusual items. Well-documented records that are rooted in source documents allows auditors to validate balances and transaction faster with less back and forth.

4. Assign Roles and Responsibilities

Define and assign specific roles and responsibilities for each audit area for accountability. Establish internal review processes before submission and set up clear communication protocols with the audit firm. Help team members across departments (finance, legal, operations) understand the importance of the audit, their specific responsibilities, and deadlines. This can prevent potential issues and bottlenecks, streamline audit requests, and support timely issue resolution.

5. Leverage Technology

Utilize tools or software that automates, organizes, and/or streamlines data management, document tracking, and communication with the audit firm. Create a structure that supports both management and compliance reporting, including chart of accounts, addback flagging/tracking, audit-to-compliance bridging. Together, technology and a well-designed structure can reduce administrative overhead, increase efficiency, and improve transparency.

6. Implement continuous training.

Train teams on the audit process, compliance requirements, common audit adjustments, and industry best practices. Build muscle memory by incorporating audit-focuses practices into month- and quarter-end closings to speed up the audit process, prevent mistakes, and maintain compliance year-round.

We Can Help

At Elliott Davis, we specialize in helping private equity firms and portfolio companies through the audit process. Contact us today to learn how we can help you streamline your audit process and ease the burden to deliver timely audited financial statements and tax reporting to lenders, investors, and other stakeholders.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

S corporations may be reevaluating their structure in light of current tax pressures. For those ineligible for the 20% Qualified Business Income (QBI) deduction (i.e., Specified Service Trades or Businesses [SSTBs] like law, accounting, or consulting firms) the idea of converting to a C corporation to benefit from the 21% flat corporate tax rate may be appealing.

However, such a move requires thoughtful planning, especially when it comes to cash flow and preserving tax efficiency. One often-overlooked strategy can help business owners manage this transition wisely: issuing shareholder notes tied to the S corporation’s Accumulated Adjustments Account (AAA) prior to conversion.

Why Now Might Be the Right Time

For S corporations planning to revoke their S election, the tax treatment of any remaining AAA balance is a significant consideration. This previously taxed income can be distributed tax-free to shareholders. But there’s a catch: Once a company becomes a C corporation, that AAA balance typically disappears. The only opportunity to distribute it without triggering additional taxes is during the Post-Termination Transition Period (PTTP)—the first taxable year after conversion.

If the company lacks the liquidity to make these distributions in cash or prefers to preserve capital for growth, this window can feel like a trap. One solution is to issue notes to shareholders equal to the balance before the S election is revoked.

How It Works

Instead of making a large cash distribution, the S corporation issues promissory notes to shareholders equal to the AAA balance. These notes must be treated as bona fide debt, with clear documentation, scheduled repayments, and appropriate interest charges. The benefits include:

• Tax-free treatment ─ Both the issuance and repayment of the notes are tax-free for the shareholders (except for the interest, which is usually taxable as ordinary income).
• Preserved liquidity ─ The company retains capital to fund operations or investments.
• Tax efficiency ─ The C corporation is taxed at the typically more favorable 21% corporate tax rate versus the rate individual S corporation shareholders are subject to (up to 37% at the top rate) for passthrough income. Additionally, interest paid on the notes may be deductible for the corporation after conversion.

An Example

Consider a successful law firm, ABC Corporation, structured as an S corporation. As an SSTB, ABC Corp is ineligible for the 20% QBI deduction so its lone individual shareholder is subject to the full 37% tax rate. With a $10 million AAA balance and big plans for future expansion, the firm wants to convert to a C corporation to benefit from the 21% flat tax rate, but it also wants to avoid depleting cash reserves.

Working with advisors at Elliott Davis, ABC Corp. distributes its AAA balance by issuing five shareholder notes of $2 million each, to be paid out annually over five years. The strategy allows the business to simultaneously:

• Preserve cash for growth over a prolonged 5-year period.
• Maintain tax-free distribution treatment for the AAA balance beyond the 1-year post-conversion PTTP rule.
• Take advantage of the more favorable 21% corporate tax rate.
• Repay the notes on a tax-free basis (apart from interest).

Who Should Consider This?

This strategy is particularly relevant for:

• S corporations with significant AAA balances.
• Companies ineligible for the QBI deduction (e.g., SSTBs).
• Business owners seeking to maintain liquidity without sacrificing tax advantages.

Pre-Conversion Checklist for S Corporations Considering C Corporation Status

Use this checklist to determine if issuing shareholder notes may be a fit for your transition strategy:

Structure and Eligibility

▢ Your business is currently taxed as an S corporation

▢ You are classified as a Specified Service Trade or Business (SSTB) and ineligible for the QBI deduction

▢ You are considering converting to a C corporation to benefit from the 21% flat tax rate

AAA Balance and Distributions

▢ Your S corporation has a substantial AAA (Accumulated Adjustments Account) balance

▢ You do not have the liquidity to make a full cash distribution during the PTTP (Post-Termination Transition Period) OR

▢ You want to preserve cash (e.g. for growth, expansion, or investment needs)

Pro Tip: Don’t wait until the last minute. Timing is important. Plan ahead so you can issue notes before revoking your S election.

We Can Help

Businesses should regularly assess whether their tax structure aligns with their long-term goals. If your S corporation is considering a conversion to a C corporation, issuing shareholder notes prior to the transition could offer an opportunity to balance tax efficiency with capital preservation.

At Elliott Davis, we work closely with business owners to craft tailored solutions that improve financial outcomes—today and for generations to come. If you’re evaluating a C corporation conversion or looking for ways to improve tax efficiency while preserving liquidity, our advisors are here to help. Contact the Elliott Davis team to explore your options.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

Markets don’t wait for clean accounting. Deals don’t pause for indecision.  And for middle market institutions considering an acquisition, raising capital, or selling mortgage servicing rights (MSRs), the stakes are rising. Success demands operational clarity, accounting discipline, and proactive planning that begins well before any deal closes.

Just one misstep can unravel hard-won progress: a mistimed capital raise can erode value, a single accounting error can shake investor confidence, and overlooked post-close obligations can lead to compliance failures or reputational damage.

Forward-thinking firms can position themselves for clean business combination closes, strategic capital that accelerates growth, and well-timed asset sales that strengthen the balance sheet.

M&A Accounting Readiness Checklist

In mergers and acquisitions (M&A), accounting diligence is foundational to operational stability and stakeholder confidence. It’s important to get it right from the start.

Financial institutions can tighten their accounting processes and set themselves up for success with the following best practices.

✓ Start Due Diligence with Audit-Readiness in Mind: Before modeling anything, validate whether the seller’s systems include the core data fields your accounting and risk teams need. If there is missing information, flag it early. Clean data is actionable data.

✓ Define Purchase Credit Deteriorated (PCD) Criteria Upfront: PCD loans affect nearly every post-close model and disclosure. Set consistent and defensible criteria, and clearly document revisions to initial assumptions throughout the due diligence process.

✓ Normalize Risk Ratings Across Institutions: Risk ratings often differ from one institution to another. Align definitions and recalibrate as needed to support comparability before integrating ratings into models or credit mark analysis.

✓ Build an Intuitive Purchase Accounting Workbook: Your workbook should serve as a single source of truth. Connect deal values, goodwill, credit marks, PCD allocations, adjustments, and accruals in a clear, traceable flow. This allows for greater levels of precision in the review process both internally and externally.

✓ Anticipate Accrual Surprises: Scrutinize the seller’s expense history to understand what additional accruals need booking at close. Missed accruals can be challenging to address post-close.

✓ Tackle Allowance for Credit Losses (ACL) with Rigor: The business combination ACL model should be treated like any other ACL model—supportable, reconciled, and documented. Update qualitative factors, segmentations, and supporting memos to address any impact the acquisition has on the legacy portfolio and credit risk.

✓ Prepare for Sarbanes-Oxley Act (SOX) and Federal Deposit Insurance Corporation Improvement Act (FDICIA) Impacts: Acquisitions often introduce new systems and processes. Engage auditors early to define scope and avoid control gaps that delay audits or trigger costly remediation efforts.

Raising Capital with Purpose in a Volatile Market

After the first quarter of 2025, middle market firms are approaching the rest of the year with a cautious focus. Having a thoughtful capital strategy sets businesses on the right path to success. For most organizations, raising capital is often the turning point that determines whether scale remains a distant vision or becomes a reality.

The following are four strategic reasons to raise capital:

Artificial Intelligence (AI) and Automation Investments

AI is quickly becoming a core driver of operational scale and profitability. With widespread industry adoption, financial institutions are reallocating capital toward intelligent systems that lower overhead, reduce risk, and increase operational resilience.

M&A with Aligned Incentives

Growth-through-acquisition remains a key growth lever, especially for firms looking to accelerate digital transformation or absorb adjacent capabilities. Successful deals start with aligned interests, particularly when it comes to management incentives.

Diversification for Risk Management

Emerging markets, new verticals, and alternative asset classes offer powerful diversification potential. As firms rebalance their portfolios in response to tariff shocks, monetary policy, and shifting demand, raising capital becomes a tool for risk mitigation, not just expansion.

Cost Control and Strategic Resourcing

Not all capital goes toward expansion. Some of the smartest plays involve consolidations, exits from non-core markets, and cost containment, especially when they support long-term agility. These moves can free up resources to reinvest in high-performing areas of the business.

Structuring Capital Raises with Compliance and Cost Management

Before entering capital markets, firms should align their capital strategy with their future business goals. Whether pursuing equity or debt, institutions must get the details right to stay audit-ready and market-relevant. With the right information in hand, companies can move faster, think bigger, and stay one step ahead.

Questions to Ask in the Strategic Planning Stage

• How much capital is needed and why?
• How will new equity or debt affect ownership, control, and financial leverage?
• What value will the proceeds plan create?
• Does the fund source align with our strategic goals?

Debt vs. Equity

• Debt Financing: Non-dilutive but increases liabilities.
• Equity Financing: Dilutive, but often fuels aggressive growth. Related expenses (legal, underwriting, document prep) are capitalized and reduce Additional Paid-In Capital (APIC).

Manage Administrative and Compliance Hurdles

• Track Capitalizable Expenses: Misclassification can lead to financial presentation and audit issues.
• Mind Staleness Dates: Miss the cutoff for using year-end financials, and you’ll need updated Q1 statements, delaying the raise.

Annual Reporting Status

Changes in reporting status can trigger expanded disclosures or impact investor perception. This should be reviewed annually.

Selling Mortgage Servicing Rights (MSRs) Strategically: Timing, Structure, and Risk

MSRs can be powerful tools for liquidity and balance sheet management, but they introduce complexity and risk that must be carefully managed. Many institutions decide to sell part of their MSR portfolio to access immediate liquidity, restructure their balance sheet, manage risk, and better position themselves for future opportunities. However, the decision to sell has implications for earnings, volatility, and future income potential.

For institutions evaluating a potential MSR sale, here are things to consider:

• Accounting Methods
  • Amortization: MSRs are expensed over the life of the mortgage.
  • Fair Value: MSRs are remeasured at each reporting period, with changes recorded in earnings.

• Interest Rate Sensitivity: Rising rates boost MSR values; falling rates reduce them.
• Accounting Guidance: ASC 860 governs the structure, sale criteria, and recognition of MSR transactions.
• Costs and Holdbacks: Legal fees, performance-based holdbacks, and refund risks all need to be modeled and disclosed.
• Post-Sale Oversight: Track earn-out triggers, maintain audit-ready records, and measure against sale assumptions.

We Can Help

Clarity in business combinations, capital raising, or MSR sales comes from rigorous preparation, cross-functional alignment, and audit-ready documentation.

At Elliott Davis, our Financial Services Group helps institutions plan with intention and execute with precision. We focus on delivering objective analysis you can use to confidently make your next move. Download our PDF from the webinar, watch the full webinar replay below, or contact our team today.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.