Buying a Business This Fall? The Diligence That Kills Bad Deals

Ahmad Majid  |  Partner  |  AccountNext LLP, Calgary | Consultative DM

The vendor's compilation is not diligence. Every EBITDA number in a teaser is an argument, not a fact, and the buyers who get hurt are the ones who negotiated price before testing the argument. Fall is deal season; here is where the problems usually hide.

Normalized EBITDA is where the price hides

The multiple gets the attention; the number it multiplies is where deals are won and lost. Vendor normalizations routinely add back the owner's salary without deducting the market cost of replacing the owner's actual work, treat recurring 'one-time' costs as one-time, and leave related party rent or supply arrangements at friendly prices that end at closing. A $200,000 swing in sustainable EBITDA at a four times multiple is $800,000 of price, which is why the first diligence question is never 'what is the multiple' but 'who built this bridge and can each add-back survive a receipt.'

The working capital peg

Sophisticated vendors win against unsophisticated buyers on the peg: the normal level of working capital that must be delivered at close. Set it carelessly and the vendor collects receivables hard and stretches payables in the final months, handing you a business that needs an immediate cash injection you thought the purchase price covered. The peg should be built from a trailing average, with the calculation method and disputes mechanism written into the agreement, not left as a closing-week negotiation.

Concentration and continuity

Two questions kill more deals than fraud ever does. What percentage of revenue sits with the top three customers, and does anything bind them past closing? And what actually walks out the door with the vendor: relationships, rainmaking, technical knowledge, the banking relationship? A business that is really one customer and one irreplaceable owner is not a business, it is a job with a purchase price.

The rule of thumb we give every buyer: expect to spend on the order of one to two percent of the purchase price learning the truth before you commit the other ninety-eight. If there is a teaser or draft LOI on your desk, send it over before you send the deposit. Telling a client not to proceed is a service we are genuinely pleased to bill for.

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Disclaimer: This article is intended for general informational purposes only. The appropriate accounting, tax, legal, and compliance approach depends on the specific facts. Consult qualified professional advisors before making decisions.