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SOC reporting for private equity

Protecting assets and avoiding surprises at exit


Our colleagues at member firm BDO USA posted the original version of this article on October 27, 2023. You can also read it below.

As private equity (PE) leaders are adopting various strategies to safeguard and expand their businesses, one approach gaining significant attention is system and organization controls (SOC) reporting. The reason behind this growing interest is SOC reporting helps enable companies to protect and grow their business by meeting customer compliance requirements through enhanced transparency and the effective communication of robust internal control processes. Private equity portfolio companies (portcos) and their operating partners are particularly focused on safeguarding their financial performance, protecting their bottom lines, maximizing revenue (EBITDA), and ultimately working toward a successful exit.

SOC reports help demonstrate the strength of a company’s internal controls environment. There is a full spectrum of SOC reports: SOC 1, 2, and 3; SOC for cybersecurity; and SOC for supply chain. The type of SOC report a company may need depends on the opportunities at hand, risks they are looking to mitigate, and which stakeholders they are looking to provide assurances to. They are especially valuable for data-rich portfolio companies that deal with sensitive customer information, particularly those operating within technology, healthcare, financial services, as well as where these industries intersect – for example, healthtech, fintech, and insuretech.

Portco customers and other business stakeholders are increasingly expecting portcos to issue SOC reports, and for good reason: These reports offer a look into a variety of internal controls, including financial reporting, security, availability, process integrity, confidentiality, and privacy. By obtaining reports, a portco can gain a competitive edge by building trust and demonstrating value to its stakeholders while strengthening internal controls — helping to lessen the chance of unexpected challenges before exit.

SOC attestation supports a winning exit strategy

A successful exit hinges on building trust and transparency with stakeholders and future investors. While there are common and understandable concerns leadership teams may have with pursuing reporting, the upfront and ongoing benefits often outweigh the costs.

The following illustrates how SOC reports can help build confidence in a portco’s control environment and help meet deal objectives:

Common reporting concern

Some SOC audits can take up to 12 months to complete and will require the company to provide an auditor with access to its systems and data.

Associated Benefits of Performing SOC Attestation

  • Increased business: Organizations that take the time to issue an SOC report can better illustrate their maturity of internal controls — which may be a priority for stakeholders. Pursuing an SOC report can help enhance an organization’s competitiveness and possibly lead to capturing new business.
  • Customer satisfaction: Stakeholders are increasingly requesting and expecting SOC reports. To keep customers happy and earn their trust, it’s important consider how a SOC report adds that extra layer of credibility.

Common reporting concern

Cost can be a barrier to entry, as some portfolio companies find it hard to justify the cost for something elective.

Associated Benefits of Performing SOC Attestation

  • Protect sales and revenue: While they require upfront investment, having SOC reports in place can help maintain existing customers who may require these reports during annual vendor risk assessments.

Common reporting concern

Many portfolio company leaders are unfamiliar with SOC reporting and are therefore not convinced of its value.

Associated Benefits of Performing SOC Attestation

  • Avoid unnecessary risks: By pursuing a SOC report, firms can better mitigate internal control risks, which can expose sensitive data. By addressing these risks sooner rather than later, it can help increase the chances of a safe and smooth exit. 
  • Demonstrate trust: SOC reporting is a tangible, third-party examination that may help illustrate necessary controls are in place, an ingredient to increasing value before exit.
  • Closed deals: SOC reporting can identify operational gaps and unaddressed weaknesses in a company’s internal controls, giving the organization the opportunity to resolve the issues proactively. Doing so can allow companies to boost efficiency, sustain investor appetite, and help position them to close deals.

How SOC reporting can help private equity 

SOC reports are not only helpful for the portco leadership team but are also valuable to the PE operating partner. Here are three keyways these reports impact both parties:

Private equity portfolio companies rely on stakeholders to be confident in their ability to meet compliance requirements and safeguard the company's revenue. One effective way to establish this confidence is by engaging an independent third party to review and report on the company's systems and controls. This external assessment allows stakeholders to verify the presence of robust internal controls, assisting with compliance and helping to drive customer retention and acquisition.

Rapidly evolving regulatory environments and heightened demands from potential investors require more stringent controls and transparency from PE funds and their portcos. SOC reporting can help leadership teams proactively identify when and where there are breakdowns in their controls, helping to reduce surprises at exit relative to unmitigated or unaddressed operational and financial risks.

Identifying risks pre-exit allows portco leadership teams and their operating partners to correct and improve internal processes before the deal closes. Reports can help reduce the company's exposure to fraud and financial loss while helping support compliance with industry regulations.

SOC reporting plays a crucial role in supporting due diligence efforts. Once a report is obtained and any identified issues are addressed, it is important to communicate the enhanced effectiveness of the portco's control environment to both investors and potential buyers. This communication helps foster trust and confidence, setting the stage for a secure exit strategy.

Third-party attestation through SOC reports offers potential buyers assurance that the portco has established mature internal controls. These reports serve as a valuable tool for evaluating the company's health and independently validating the adequacy of its control environment. By providing a verified measure of the company's control environment, SOC reporting aids in the investment decision-making process.

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