A client forwards you a message. “We’d like to talk about acquiring your company.” The owner hasn’t hired a banker or decided to sell. You’re the first adviser they call.

The buyer may already have a price range in mind. Your client needs to know what earnings that price assumes and what could change it after diligence. That’s where a CPA can help before the owner shares the books or agrees to exclusivity.

What buyers test in the books

When a buyer values a company on a multiple of adjusted EBITDA, each proposed adjustment can affect the price. Buyers also look at the working capital the business will need after closing. Four areas deserve an early review.

Support each addback. Show where the expense sits in the ledger, what it paid for and why it would end under new ownership. An invoice can establish that an expense occurred. The buyer still needs a reason to believe it won’t recur. If a buyer rejects $150,000 of proposed addbacks at a fixed 6× multiple, indicated enterprise value falls by $900,000.

Price the work the owner does. If the owner takes a below-market salary, estimate the full cost of replacing the functions a buyer will still need. A buyer may accept an addback for existing owner pay and then deduct the cost of replacement compensation.

Check revenue timing and collections. Review whether revenue was recorded in the right period, whether customer deposits were earned and whether receivables are collectible. In one contractor deal, customer payment times stretched from 45 to 63 days. That matters to the buyer funding operations and to the seller negotiating the working capital target. The parties compare the net working capital delivered at closing with that target, and the agreed formula can increase or decrease the price.^[1]

Normalize related-party costs. If the owner rents the building to the company below market and plans to keep the property, the proposed lease can reduce the earnings a buyer underwrites. Get support for market rent and model the lease terms before pricing the business.

Commission a sell-side quality of earnings review

A quality of earnings review, or QoE, reconciles reported results to adjusted earnings and tests the assumptions behind them. The buyer’s team will make its own judgments about recurring costs, revenue cutoff and working capital. A review commissioned on the sell side gives the owner a chance to examine those issues first.^[2]

Timing matters. Once the owner grants exclusivity, it can be harder to turn to other buyers if diligence changes the economics. Find out which adjustments are likely to be disputed before the owner takes the business off the market.

DJ Panfili and I brought a medical practice deal to the table that illustrates the problem. The practice went to market with $4.3 million in EBITDA. The buyer modeled $3.8 million, and the owner’s CPA calculated $4.1 million. The differences became the central argument over price. A sell-side review could have reconciled the three calculations earlier and identified which disagreements still needed to be negotiated.

The buyer and its lender may still challenge an adjustment. Ask the buyer to show the accounts, periods and amounts behind its position. If the same item affects earnings and closing working capital, check how each effect enters the price calculation.

If a buyer asks for financials, the owner can say, “We can share an earnings summary after we sign a confidentiality agreement. Before we discuss price, we’d like to understand which earnings and working capital assumptions your offer would use.”

Before a buyer calls

For a client who may sell in the next few years, start with the schedules a buyer will ask to see.

Reconcile monthly financial statements to the general ledger and explain differences between the books and tax returns. Build a schedule from reported EBITDA to adjusted EBITDA, with support for each adjustment.
Review how the company records owner expenses and related-party transactions. Correct classification and documentation issues early, and keep personal spending separate from the company’s accounts.
Maintain monthly working capital schedules and receivables aging. Consider a sell-side QoE when a sale is likely or a serious buyer has emerged, particularly if the adjustments could materially affect the price.

When a buyer calls

Confirm who the buyer is, who will fund the acquisition and which approvals remain. Ask the deal adviser to verify funding before the owner shares detailed records or grants exclusivity.
After an NDA, start with a financial summary or approved QoE materials. Share the ledger and supporting schedules through a controlled data room as diligence advances.
Ask the buyer to put the EBITDA basis, the price and the proposed working capital treatment in writing. Review the assumptions with the owner before they respond to earnings questions or sign a letter of intent.

When your client forwards that first message, ask for the latest monthly financials and walk through the adjustments together. The owner can then hear an offer and ask the buyer which earnings it is paying for.

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Ciaran Houlihan is co-founder and COO of Deal Flow, a buyer-funded M&A advisory firm that pays for sell-side quality of earnings reviews for qualifying sellers. He has spent over $30 million in advertising on core funnels, first through his previous agency, Customers on Command, and now leads Deal Flow’s marketing and deal origination, using digital marketing and applied AI to reach business owners before they ever call a banker.