Get Your Numbers Right Before You Sell Your Company
- Bad numbers kill deals: According to M&A veteran David Barnes, unreliable financials are the number one reason acquisitions fall apart, and they drag down 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: Net working capital adjustments can cut millions from your price at the closing 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. In reality, one of the hardest parts happens after the handshake, when the buyer's accountants start pulling your books apart line by line.
On a recent CEO Roundtable, hosts JD Beck and Ryan Nichols sat down with David Barnes, a deal junkie with more than 30 years in M&A and hundreds of home service acquisitions behind him. David was part of a 200-deal roll-up at Protection One in alarm monitoring and has worked on roll-ups in solar, pest control and roofing.
When he was asked about the worst deal he had been part of, he offered one opening lesson for every owner, whether they plan to buy or sell: get your numbers right before you pull the trigger.
Why Bad Numbers Are the Number One Deal Killer
The Lumio Lesson
David has seen the best and worst of roll-ups. One of the most instructive was Lumio, a solar roll-up that he describes as an unbelievably great concept at the beginning that "flew too close to the sun and blew up."
The roll-up was trying to bring five companies under one roof. Two of them had financials David calls "an absolute mess." It took more than eight months just to get their numbers right.
That delay is the real cost. As David puts it, the longer a deal takes, the lower the probability that it closes.
"Time kills all deals. Time is the enemy of transactions. The longer it takes to get a deal done, the lower the probability."
Treat Your Company Like a House on the Market
David compares selling a company to selling a house. Before you list a home, you clean it up and stage it. Before you take a company to market, you do the same thing with your financials, starting with accrual accounting.
Cash-basis books might be fine for running day to day. They are not fine when a buyer wants to understand exactly when revenue was earned and when costs were incurred. Unreliable numbers do more than slow the process. They damage your credibility with the buyer and pull down your valuation.
What a Quality of Earnings Report Is and Why It Matters
The Good Housekeeping Seal for Your Financials
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.
Here is what that typically looks like:
- Timeline: Roughly two to three weeks when the books are clean.
- Output: A 40 to 50 page document verifying your numbers.
- Cost: Anywhere from $50,000 to $100,000.
- Purpose: It tells lenders and buyers your numbers are reliable, and the accounting firm puts its name next to that claim.
On the Lumio deal, the QoE for one of the companies took eight months instead of the usual few weeks. That is what messy books cost you.
Buyers Bring Their Own Accountants
Your QoE is not the end of it. Serious buyers hire their own independent accounting firm to run their own review. Then, in David's words, the two firms "get in a room and beat each other up" until they agree on one number: reliable EBITDA.
Everything in the deal comes back to that figure. The cleaner your books are going in, the less room the buyer's team has to argue it down.
Look Beyond the Historical Numbers
Trends Matter as Much as History
JD Beck added an important point. Clean historical numbers are the baseline, but buyers care just as much about what is happening right now and over the next few months. If your history looks great but your current trend is weakening, buyers will "beat you up big time."
He also encouraged owners to play devil's advocate with their own books. Is anything hidden or miscategorized? Is there new legislation coming, a product being discontinued, or a price increase that could land in the middle of due diligence? As JD noted, a seller may not disclose those changes because they know it has a big impact, which is exactly why buyers go looking.
Customer Concentration and Ticking Time Bombs
David noted that some private equity buyers, especially independent sponsors, now go further than accountants. They hire third-party industry experts who can spend another month producing a white paper on the company and its market. They are looking for ticking time bombs that pure number-crunchers might miss, including legislation, a lost customer and customer concentration.
On concentration, David was blunt. "If 50% of your sales are to one customer, you don't really have a company." As Ryan put it, that is too much risk for somebody to take on.
Net Working Capital: Where the Blood Gets Spilled
How the Math Works
Ryan Nichols raised the topic that causes more closing-table fights than anything else: net working capital.
The formula is simple. Net working capital equals current assets minus current liabilities, excluding debt and cash. To set a normal level, deals typically look back 12 months and forward 12 months, using the average normalized figure across 24 balance sheets.
How Buyers Use It Against You
This is where sophisticated buyers can quietly take money off the table. David said more blood is spilled over this topic than any other, because buyers often use the adjustment "to basically steal money from the seller."
Here is how it plays out. The business has $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 purchase price. Ryan said he has watched this happen 10 times over the past year, right at the closing table.
David Barnes: "That working capital adjustment has to be agreed upon in the letter of intent. Way before you spend money with lawyers documenting a deal... If you can get documentation of exactly how you're going to calculate that working capital adjustment baked into the letter of intent 90 days before you close the deal, you avoid all that bloodshed."
There is also an operational side. A company needs enough working capital to run. David has seen businesses run out of it within the first 60 days of a deal, break their loan covenants and go into default.
How Private Equity Actually Finances an Acquisition
Debt, Equity and Safe Leverage
Understanding how buyers fund a deal helps you understand why they push so hard on EBITDA. Private equity always combines 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 comes in layers. Senior debt is the cheapest, typically 5 to 8 percent interest. Subordinated or mezzanine debt is riskier and more expensive, often 11 to 18 percent. Most companies can carry total debt of about 3.5 to 5 times EBITDA, and most PE firms prefer to stay under 4 times.
A Worked Example
David walked through a $100 million deal for a company with $20 million of EBITDA, bought at 5 times:
- Owner rollover: The owners roll 20 percent, or $20 million, into the new company.
- PE equity: The private equity firm puts in $30 million.
- Debt: The remaining $50 million is financed with debt.
That is 2.5 times debt to EBITDA, which David calls a nice, safe capital structure. Now imagine the same $100 million price for a company with $10 million of EBITDA, bought at 10 times with $50 million of debt. That is 5 times leverage, and if everything does not go perfectly, the company can blow its covenants and default. When that happens, the lender owns the company. That is what happened at Lumio, where the lender ended up owning a company it never wanted to run.
Protect the Value After the Deal Closes
Your People Are the Asset
According to David, the biggest mistakes in M&A happen when a company is bought but its value is not preserved. Key people decide they do not want to be part of a bigger company and walk out the door, sometimes taking customers with them. "A lot of times M&A kills really good companies," he said. "I've seen that happen a lot."
Build a 100-Day Plan
His solution is a 100-day plan built together by the buyer and the seller. It maps out operations, finance, sales and marketing, who is doing what and who is in charge, so there is no confusion and far less anxiety across the team. "Failing to plan is planning to fail."
He also stressed representation. "Good lawyers are worth every penny you pay them," because they know how to structure and document a deal in a way that keeps you out of trouble.
Your Pre-Sale Financial Checklist
JD summarized the episode in three points: have everything in line going into the deal, have strong representation in your corner, and have a clear plan for the company and your key people during and after the transaction. Here is how to turn that into action:
- Move to accrual accounting and make sure your monthly financials close on time.
- Consider a sell-side QoE so you find the problems before the buyer does.
- Review customer concentration and diversify if one customer carries too much of your revenue.
- Track trends, not just totals, so you can explain where the business is heading.
- Understand your normal working capital before anyone else defines it for you.
- Retain key people with equity or incentives, and draft your 100-day plan early.
Frequently Asked Questions
What kills most business acquisitions?
According to David Barnes, the number one deal killer is bad, unreliable numbers. They slow down due diligence, damage credibility with the buyer and reduce valuation.
What is a Quality of Earnings report?
A Quality of Earnings report is an independent review of a company's financials by a third-party accounting firm. It typically takes two to three weeks, runs 40 to 50 pages and costs $50,000 to $100,000.
What is a net working capital adjustment?
It compares the working capital delivered at closing against an agreed normal level. If the buyer sets that normal level high, the difference comes off your purchase price, which is why the calculation method should be agreed in the letter of intent.
How much debt can a company support in an acquisition?
David says most companies can support total debt of roughly 3.5 to 5 times EBITDA, and most private equity firms prefer to stay under 4 times to keep the capital structure safe.
Conclusion
Selling a company is not just a negotiation over price. It is a test of whether your numbers can survive a buyer's accountants, consultants and lawyers. Owners who clean up their books early, understand working capital and plan for life after the deal walk away with more of the value they built.
Start now, long before you ever take a call from a buyer. The same systems that make your numbers reliable also make your company easier to run while you still own it.
