Selling a Company: 6 Numbers Buyers Check First
- Bad numbers kill deals: David Barnes calls unreliable financials the number one reason acquisitions fall apart, and they cut your valuation even when the deal survives.
- Time is the enemy: Messy books stretch a two-to-three-week Quality of Earnings review into months, and every extra month lowers the odds of closing.
- The fight happens late: A net working capital adjustment can pull millions off your price at the table unless the method is locked into the letter of intent.
Most owners think the hard part of selling a company is finding the right buyer. The harder part comes after the handshake, when the buyer's accountants start pulling your books apart line by line.
On a Forge CEO Roundtable, hosts JD Beck and Ryan Nichols sat down with David Barnes, who has more than 30 years in mergers and acquisitions and hundreds of home service deals behind him, including a 200-deal roll-up at Protection One and roll-ups in solar, pest control, and roofing. His opening lesson for anyone who might buy or sell: get your numbers right before you pull the trigger. Here are the six that decide what you walk away with.
Why Bad Numbers Are the Number One Deal Killer
Unreliable financials are the fastest way to lose a deal, and they drag down your price even when the sale survives. David has seen it firsthand. He points to Lumio, a solar roll-up he calls an unbelievably great concept that "flew too close to the sun and blew up."
The roll-up tried to bring five companies under one roof. Two of them had books David describes as "an absolute mess," and it took more than eight months just to get their numbers straight. That delay is the real cost.
He compares taking a company to market with selling a house. You clean and stage a home before you list it, and you do the same with your financials before a buyer sees them, starting with accrual accounting. Cash-basis books can run a business day to day, but they fail the moment a buyer wants to know exactly when revenue was earned and when costs hit. Messy numbers do not just slow things down. They cost you credibility and valuation.
What a Quality of Earnings Report Actually Does
A Quality of Earnings report, or QoE, is an independent review of your financials by a third-party accounting firm. David calls it the Good Housekeeping Seal of Approval for your company, because the firm puts its name next to the claim that your numbers are real.
When the books are clean, a QoE runs roughly two to three weeks, produces a 40 to 50 page document, and costs somewhere between $50,000 and $100,000. On the Lumio deal, one company's QoE took eight months instead of a few weeks. The timeline is a direct readout of how clean your books are.
Your own QoE is not the finish line. Serious buyers hire their own accounting firm to run a second review, and the two firms, in David's words, "get in a room and beat each other up" until they agree on one figure: reliable EBITDA. Everything else in the deal keys off that number, so the cleaner your books go in, the less room the buyer's team has to argue it down.
Buyers also look past history. JD Beck noted that clean past numbers are the baseline, but buyers care just as much about the current trend. If your history is strong and your momentum is fading, they will "beat you up big time." Some private equity buyers now hire industry experts who spend a month writing a white paper hunting for ticking time bombs: pending legislation, a lost account, or customer concentration. On that last one David was blunt.
Net Working Capital: Where Deals Lose Millions
Net working capital is the single biggest source of closing-table fights, and it is where a sophisticated buyer can quietly pull money off the table. The formula is simple: current assets minus current liabilities, excluding debt and cash. To set a normal level, deals usually average the normalized figure across 24 balance sheets, looking back 12 months and forward 12.
The trouble starts when the buyer sets that normal level high. David said more blood is spilled here than anywhere else, because buyers often use the adjustment "to basically steal money from the seller." Picture a business with $4 million of working capital at close. The buyer argues the normal level should be $10 million and demands the $6 million difference come off the price. Ryan Nichols said he has watched that exact move happen 10 times in the past year.
There is an operating side too. A company needs enough working capital to run, and David has watched businesses run dry within 60 days of closing, break their loan covenants, and fall into default.
How Private Equity Finances an Acquisition
Understanding how buyers fund a deal explains why they push so hard on EBITDA. Private equity always mixes debt and equity. Years ago a deal might be 5 percent equity and 95 percent debt; today David says it is closer to 50/50, sometimes 40/60. The debt stacks in layers: senior debt is cheapest at roughly 5 to 8 percent, while subordinated or mezzanine debt runs 11 to 18 percent. Most companies can carry total debt of about 3.5 to 5 times EBITDA, and most firms prefer to stay under 4.
David walked through a $100 million purchase of a company with $20 million of EBITDA, bought at 5 times. The owners roll 20 percent, or $20 million, into the new company. The private equity firm puts in $30 million of equity. The remaining $50 million is debt. That is 2.5 times debt to EBITDA, which he calls a safe capital structure.
Now run the same $100 million price against a company with only $10 million of EBITDA, bought at 10 times with $50 million of debt. That is 5 times leverage, and if anything goes wrong the company blows its covenants and defaults. When that happens, the lender ends up owning the business. That is exactly how Lumio ended, with a lender holding a company it never wanted to run.
How to Protect Your Company's Value After the Sale
The biggest M&A mistakes happen after the close, when the company is bought but its value is not preserved. Key people decide they do not want to work for a bigger company and walk, sometimes taking customers with them.
His fix is a 100-day plan built jointly by buyer and seller, mapping operations, finance, sales, and marketing, with clear ownership of every piece so the team feels less confusion and less anxiety. As he put it, "failing to plan is planning to fail." He also pushed hard on representation, because "good lawyers are worth every penny you pay them" when it comes to structuring and documenting a deal that keeps you out of trouble. Retaining people, usually through equity or incentives, protects the asset you actually sold.
How to Get Your Numbers Ready Before You Sell
Start long before a buyer ever calls:
- Move to accrual accounting. Close your monthly financials on time so revenue and costs land in the right period.
- Commission a sell-side QoE. Find and fix the problems before the buyer's accountants do.
- Review customer concentration. Diversify if any single customer carries too much of your revenue.
- Track trends, not just totals. Be ready to explain where the business is heading this quarter.
- Define your normal working capital. Know the number and the method before the buyer sets it for you.
- Lock the method into the letter of intent. Agree how the working capital adjustment is calculated before lawyers start billing.
Frequently Asked Questions
What kills most business acquisitions?
David Barnes says the number one deal killer is bad, unreliable numbers. Messy books slow due diligence, damage your credibility with the buyer, and pull down your valuation. They also stretch the timeline, and the longer a deal drags on, the lower the odds it closes. Clean, accrual-based financials are the single best protection against losing a deal you want to make.
What is a Quality of Earnings report and what does it cost?
A Quality of Earnings report is an independent review of your financials by a third-party accounting firm that verifies your numbers for buyers and lenders. When your books are clean it takes about two to three weeks, runs 40 to 50 pages, and costs between $50,000 and $100,000. If the books are messy, that timeline can stretch to months, which signals risk to a buyer.
What is a net working capital adjustment?
It compares the working capital you deliver at closing against an agreed normal level, usually averaged across 24 balance sheets. If the buyer sets that normal level high, the shortfall comes straight off your purchase price. David Barnes has seen the gap reach millions, which is why the calculation method should be written into the letter of intent before lawyers document the deal.
How much debt can a company support in an acquisition?
David Barnes says most companies can carry total debt of roughly 3.5 to 5 times EBITDA, and most private equity firms prefer to stay under 4 times to keep the structure safe. Senior debt runs about 5 to 8 percent and mezzanine debt 11 to 18 percent. Push leverage to 5 times and a single bad quarter can break covenants and hand the company to the lender.
How do you keep value after a company is acquired?
Build a 100-day plan with the buyer that assigns clear ownership across operations, finance, sales, and marketing, so nothing stalls and the team stays calm. Retain key people with equity or incentives before they decide to leave, since their exit can take customers with it. David Barnes also stresses strong legal representation to structure and document the deal correctly.
Conclusion
Selling a company is not just a negotiation over price. It is a test of whether your numbers survive the buyer's accountants, consultants, and lawyers. Owners who move to accrual accounting early, understand their working capital, and build a plan for the people who stay walk away with more of the value they created. Start now, long before you take a call from a buyer. The same systems that make your numbers reliable also make the company easier to run while you still own it.