As private equity (PE) leaders adopt strategies to safeguard and grow their portfolio companies, one approach gaining significant attention is SOC audit services. SOC reporting can help portfolio companies meet customer compliance requirements, strengthen transparency, and demonstrate the effectiveness of their internal controls. 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 table illustrates how SOC reports can help build confidence in a portco’s control environment and help meet deal objectives:
| Common Reporting Concerns | Associated Benefits of Performing SOC Attestation |
| Time commitment and business disruption: 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. | 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. |
| Discretionary expense: Cost can be a barrier to entry, as some portfolio companies find it hard to justify the cost for something elective. | 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. |
| Unclear value: Many portfolio company leaders are unfamiliar with SOC reporting and are therefore not convinced of its value. | 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:
Protect and Maximize Revenue
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.
Reduce Risk
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. Understanding common SOC 2 compliance gaps can help leadership identify weaknesses in areas such as policies, access controls, risk management, and supporting documentation before those issues surface during an audit or transaction. Addressing these risks early can reduce the company’s exposure to fraud and financial loss while supporting compliance with applicable industry regulations. Reports can help reduce the company’s exposure to fraud and financial loss while helping support compliance with industry regulations such as Sarbanes-Oxley (SOX) or the Gramm-Leach-Bliley Act (GLBA).
Secure a Safe Exit
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.
Getting Ready for SOC Reporting
Preparing early can make the SOC reporting process significantly more efficient. Portfolio companies should first evaluate their control environment, determine the appropriate SOC report, identify potential deficiencies, and establish clear ownership for evidence collection and remediation.
A readiness assessment can help uncover weaknesses before formal testing begins. It is also valuable for leadership teams to understand common SOC audit challenges, including evidence collection, control documentation, stakeholder coordination, and maintaining consistent control performance throughout the audit period.
Addressing these issues before the formal examination can reduce disruption, prevent unnecessary delays, and give management more time to remediate weaknesses that could otherwise become concerns for customers, investors, or prospective buyers.
Strengthen SOC Readiness Across Your Portfolio
SOC reporting should not be treated solely as a compliance exercise. For private equity firms and their portfolio companies, a strong control environment can help protect revenue, satisfy customer requirements, reduce transaction risk, and prevent control weaknesses from becoming surprises during due diligence or exit.
LBMC’s SOC audit services help organizations navigate SOC 1, SOC 2, and SOC 3 reporting, from determining the appropriate examination through readiness, testing, and reporting.
For organizations with broader financial reporting, risk, compliance, and assurance needs, explore LBMC’s audit and assurance services.
Preparing a portfolio company for SOC reporting or an upcoming transaction? Contact LBMC to discuss your control environment, reporting requirements, and next steps.
LBMC’s team brings extensive experience working with private equity firms and portfolio companies across industries including healthcare, manufacturing, technology, and professional services.
Content provided by LBMC Cybersecurity Practice Leader Drew Hendrickson.
