How many times has this happened to you? Your client calls in February to tell you he has already signed a letter of intent to sell his business. A buyer approached him the previous fall and your name didn't come up at the time. Why? Because a buyout offer sounded like a legal matter to your client so he only called his attorney.
Meanwhile, the price has already been set and the working capital adjustment and the earnout both have a shape. Over the next 90 days, you will answer a few hundred questions from people you've never met, on deadlines you did not set, about a company you understand better than any of the others do.
Most of those answers are worth real money to your client. Unfortunately, very little of that value will reach him.
Four things the buyer cannot buy
Outside of your client, nobody knows more about how your client's business makes money or why its numbers look the way they do than you. For instance:
- Why the numbers moved. Gross margin dropped 180 basis points in the third quarter of 2023. The buyer will assume a margin trend and price a risk. You know better: It was one bad copper contract that corrected in January.
- Which numbers are soft. You know where the estimates live, which reserve has rolled forward three years untouched, and where the cutoff gets loose in December. You have that at your fingertips way before anyone digs for it in diligence.
- What is personal inside the business? The vehicle, the son on the payroll at $90,000 for work worth $40,000, the below-market rent to the owner's real estate LLC, the consulting fee for a friend from church. You know every normalization argument lives here and that none of it shows in the general ledger.
- Where the owner's mindset really is. Only you know whether the owner is really interested in selling or just enjoys being courted. Only you know what number will make him say yes, or whether he has told his spouse about the offer. Only you know whether the owner's daughter thinks she'll be running this company in four years. Deals collapse because of these dynamics and the banker only learns it in month four.
Buyers cannot purchase this kind of expertise. They can hire the best diligence firm in the country, but reconstruction has a ceiling because most of what you know was never written down. Every other input can be bought. Yours took 11 years, and no budget compresses that.
Why the buyer wants it from you
Here is what happens to your work after it leaves your office: Your financials go into a data room on Monday. A buy-side associate opens it that afternoon. By Wednesday he has built a monthly EBITDA bridge, and he is not reading your income statement. He is reading the shape of the line. By Friday he has questions, close to the same ones every time.
- Why did gross margin move in the third quarter, and did it move back?
- The owner's compensation add-back: What would it cost to hire someone for that job?
- The related-party rent is below market. What is it at market?
- Three one-time items appear in three consecutive years. In what sense are they one-time?
- The largest customer accounts for 31% of revenue. Is there a contract, and when does it renew?
- Revenue jumped in the two months before the process started. What changed?
You know every answer already without opening a file. The associate doesn't and will spend three weeks and a meaningful fee arriving at less-informed answers than the ones already in your head.
The financial workstream in diligence is essentially an expensive reconstruction of things you already know. You supply it, accurately, on time and for nothing, to the party negotiating against your client.
The cost of not being asked
Say your client is a $25 million revenue distributor with $3 million of EBITDA, and the buyer is working from a 6x multiple. The sell-side add-back schedule claims $400,000 — $250,000 of above-market owner compensation, plus a $100,000 legal settlement, and $50,000 of contract consulting labeled one-time. Nobody asks you about the consulting. You would have flagged it because you've booked it three years running and it is a normal-course operating expense.
The buyer rejects it. Adjusted EBITDA settles at $3.35 million.
But when the numbers are run again (with you involved this time), the schedule claims $350,000 and lands at the same $3.35 million. Same economics. Different diligence history.
In one case the seller presented a supportable earnings bridge. In the other, the buyer had to correct it. Every sell-side schedule advocates for the seller. A weak adjustment gives the buyer reason to scrutinize the rest more closely.
A bad add-back does not mechanically reduce the multiple. But confidence in the earnings presentation can affect valuation. If that costs even a quarter turn, $3.35 million moves from $20.1 million of enterprise value at 6x to roughly $19.26 million at 5.75x. About $840,000 of enterprise value was put at risk over a $50,000 adjustment that never needed defending.
The information was there. The person who understood it simply wasn't consulted.
Nobody is behaving unethically; the buy-sell sequence runs against you. The attorney usually takes the first call. She protects the client's position, gets the nondisclosure right, and keeps an unsolicited offer contained. Pricing is not in their lane. What arrives at your desk, weeks later is a data room login. Your role is never defined, so it defaults to answering requests.
A letter of intent sets the price, it establishes that a working capital adjustment will apply, and it gives the earnout a shape. What the LOI almost never does is define the working capital adjustment or the earnout. The peg calculation and the policies behind it, what counts as revenue for an earnout, which liabilities are indebtedness and which are working capital, are all contested in the purchase agreement afterward. Those are accounting questions. They sit right in your lane, and they routinely move more money than the last turn of negotiation on price.
Know your lane and say where it ends
Plenty of you run compliance practices. You don't think you have bandwidth for a live transaction, and your liability coverage excludes opining on deal terms. So, are you a tax structuring expert who reads purchase agreements and thinks like a buyer? Or are you the accountant and the tax CPA?
For many of you it's the latter. That's OK, just make it clear as soon as your client's business is in play what you can do and where you need to consult a specialist. Don't wait until several months into diligence. Good, proactive CPAs don't get caught off guard when a client receives an LOI. They're ready for it. You can be too by taking steps like these:
- Keep a heartbeat on where the client is headed. Put the question on a schedule: Is anyone approaching you about buying the company? Where is your head on succession? Owners rarely raise the discussion unprompted, but if asked routinely they will readily answer.
- Tell every business owner client to call you as soon as they call their attorney when receiving a purchase offer. Delivered years ahead of time, that one instruction puts you at the front of the sequence rather than at the end.
- Name soft spots in the financials before diligence finds them. A weakness the seller discloses early costs a line item. The same weakness found by a buyer later costs a multiple because it changes how the buyer reads everything else you hand him.
- Stand behind the add-back schedule instead of validating someone else's. You have the most context on which items are genuinely non-recurring. A disciplined schedule built with that context is worth more than an aggressive one without it. Credibility gets priced.
- Ask to see the working capital and earnout language before it is papered. Not the price. The definitions. Read the draft the way you'd read an accounting policy, because that's what it is.
What you know is the scarcest input in the transaction. Whether it works for your client or simply gets extracted comes down to whether anyone thinks to ask you a question. Few people do. Which means the question has to come from you.
