The Numbers Have to Hold Up Long Before a Buyer Looks at Them

The Coordination Series · Part 2 of 5

Once the letter of intent (LOI) is signed, a buyer’s diligence team doesn’t start by diving into the projections. They start by confirming that the historic numbers presented can be trusted. Their quality-of-earnings (QoE) team will analyze every line item in the P&L and balance sheet, and test every accrual and revenue recognition policy. The owner wants the buyer to honor the price they agreed to in the LOI, and the QoE report is often the most important hurdle to achieving that goal.

Two Kinds of Problems:

Gradual margin erosion. Customer concentration. A sales pipeline that lacks consistency. Most buyers have seen these issues before, and they don’t walk away from the deal. They’ve been made aware of them during the pre-LOI process, and they price it accordingly. It may have resulted in an earnout or a lower multiple, but the deal survives because the problem is understood and the numbers describing it can be trusted.

Multi-year contracts recognized as revenue in a single period. Accrual policies that misalign project costs with revenues. Gross margins that aren’t fully burdened and overstate operating leverage. This is why deals that looked settled weeks earlier come apart in diligence. Once a buyer stops trusting one number, they stop trusting all of them. An owner who waits until an LOI is on the table to think about any of this has already lost the window of opportunity to address these issues. By the time a quality-of-earnings team finds them, there’s no way to fix them, only a slower and more expensive path to potentially restructuring the deal.

The difference between these two scenarios comes down to whether a CPA was in the room early enough to shape how these numbers were recorded in the first place.

What a CPA’s Job Actually Becomes

A controller or outsourced bookkeeper keeps the business running day to day: payroll, monthly closes, a cash-based P&L an owner can read at a glance. None of that is wrong, but none of it was built for an M&A process. A CPA with an eye on an eventual transaction is doing something else. They’re making sure years of revenue-recognition and accrual policies will hold up once someone outside the company starts testing them line by line, under no obligation to give the business the benefit of the doubt. That’s a different skill set than closing the books every month, and it’s worth knowing which one an owner’s CPA actually has before a buyer is the one asking.

As an M&A advisor, our role at BPCA isn’t to sit inside the CPA’s books. But with our years of deal experience, we can flag the accounting issues likely to come up during the process. This only works if we’re brought in early, while there’s still time to address them. We can work directly with an owner’s existing CPA regarding deal timing, what’s realistic to fix in-house, and where outside help may be needed before we start a process.

We’ve worked with businesses where the numbers are cash-based or accruals are hit and miss. Sometimes it doesn’t make sense, either because of timing or cost, to clean up the books before going to market. And we’ve successfully closed those transactions by being transparent with buyers from the start. But the benefit of clean numbers is that they tend to protect the valuation in the LOI. It’s worth it to start thinking about that years before selling.

Next: The Attorney Conversation With the Shortest Shelf Life.