Five Things That Kill Deals in Diligence

Not every deal should close. Diligence exists to tell you which ones should not.

Here are five things we see in QoE analysis that kill deals or force renegotiations.

1. Add-backs that do not hold up

Sellers present adjusted EBITDA with add-backs for personal expenses, one-time costs, and owner comp. Some are legitimate. The country club membership is a real add-back.

But if the seller added back $200K in "one-time marketing" and the business needs $200K a year in marketing to keep revenue where it is, that is not an add-back. That is an operating expense.

We see inflated add-backs in more than half the deals we review.

2. Customer concentration worse than the CIM shows

The CIM says 150 customers. What it does not say is that three of them are 60% of revenue and one has no contract. Lose that customer and the business does not service the debt.

Concentration is not disqualifying. But you need to quantify it and price it into the deal.

3. Bank statements that do not match the books

Simplest test. Most common catch. We reconcile bank statements to reported revenue. If they match, good. If they do not, we find out why.

Usually it is sloppy bookkeeping or timing. Sometimes it is not.

4. Working capital drawn down before closing

The seller has been pulling cash for months. AR is extended. Payables current. Inventory lean. The P&L looks fine but the business is running on fumes.

Day one you need to inject cash to get working capital back to normal. If you did not price that in, it comes out of your pocket.

5. Revenue declining under a flat annual number

TTM revenue looks flat. But month by month the trend is down. Last two quarters weaker than the first two. The annual number masks a business losing momentum.

Seasonal, cyclical, or structural. Each has a different implication for the price.

The pattern

None of these show up in a CIM or a tax return review. All of them show up in a QoE.

The report costs a fraction of one of these mistakes.