Typical Pitfalls in a Sale/Acquisition Process
A guide for business owners
Twelve issues that can disrupt a deal, and practical steps to address them before they become surprises.
Overview
Buyers need to understand how the figures presented connect to the underlying business. Unexplained differences can undermine confidence, change financing assumptions and reopen discussions about price. Preparation means reconciling the evidence, addressing relevant risks and testing the buyer’s ability to execute.
Three takeaways
- Build a clear bridge from accounting records to management figures and normalized earnings. Support adjustments rather than assuming a buyer will accept them.
- Give transaction counsel relevant legal facts early. Counsel should direct disclosure scope, privilege protections and access, especially for personal matters that affect the deal.
- Align owners, test funding and assign diligence responsibilities while continuing to sell, collect cash and report results.
Considerations
- EBITDA means earnings before interest, taxes, depreciation and amortization. A Quality of Earnings (QoE) review is not an audit or a substitute for legal, tax and operational diligence.
- QoE differences may be legitimate. A difference in adjusted earnings is not, by itself, evidence of dishonesty; unexplained differences in periods, entities or accounting basis still need reconciliation.
Structures and outcomes depend on the business, counterparties and definitive documents. Consult your legal, tax and accounting advisers.
Financial credibility comes first
| Pitfall | Why it matters | Prepare before diligence |
|---|---|---|
| 1. Quality of Earnings (QoE) does not reconcile | QoE may adjust reported earnings. The problem is an unexplained gap between the accounts, management presentation and normalized results. | Build a bridge from the ledger and financial statements to reported EBITDA, management adjustments and QoE findings. Explain differences in periods, entities and accounting basis. |
| 2. Unsupported add-backs | An owner expense, litigation cost or one-time label does not automatically make a cost removable. Replacement management or recurring costs may remain. | Support adjustments with invoices, dates and explanations. Identify related-party arrangements and personal expenses. Show the cost a buyer would actually inherit. |
| 3. Revenue and forecasts cannot be substantiated | Early revenue recognition, weak collections, customer losses or a forecast built on unsigned business can overstate the operating picture. | Reconcile sales to accounting records; review cutoff, returns and receivables. Distinguish contracted orders from pipeline. Explain concentration, churn and downside assumptions. |
| 4. Working capital and liabilities are overlooked | A headline price is not the amount available to owners. Working capital adjustments, debt-like obligations and expenses can change proceeds. | Prepare monthly working capital, aging and inventory schedules. Review debt, unpaid taxes, bonuses and other obligations. Agree definitions and avoid counting one item twice. |
Illustration: an earnings gap can become a value gap
Management presents $5.0 million of adjusted EBITDA. Diligence removes $0.6 million of unsupported add-backs and $0.4 million of revenue recorded in the wrong period, leaving $4.0 million. At a purely illustrative unchanged 8.0x multiple, enterprise value changes from $40 million to $32 million.
This is arithmetic, not a market benchmark, offer or forecast; actual pricing and proceeds depend on negotiated terms.
Disclose issues before they become surprises
Do not conceal a relevant lawsuit because it is disputed, insured, personal or expected to settle. Give transaction counsel the facts early and agree what must be disclosed, when and how. Late discoveries can damage trust and affect price, protections or closing.
5. Business lawsuits and claims
Identify pending and threatened claims, demand letters, investigations, judgments and settlements, including earlier matters with continuing obligations. Ask counsel to assess relevance and the disclosure requirements in the transaction documents.
Prepare a factual summary of status, amounts claimed, counsel involved, insurance position and possible business effects. Do not present an allegation as established wrongdoing or assume insurance removes the exposure.
6. Personal matters that affect the deal
Tell counsel about personal litigation, judgments, bankruptcy, divorce or guarantees that could affect the transaction. Relevant effects may include ownership rights, liens, authority to sell, sale proceeds or the owner’s continuing role. A personal label does not make an issue irrelevant.
Counsel should determine the necessary scope of disclosure. Unrelated private details should not be circulated broadly. Document any required approvals, releases or resolution steps before committing to a closing date.
7. Ownership, contracts and IP are unclear
An inaccurate capitalization table, disputed equity, missing intellectual-property assignments or required customer, landlord or lender consents can obstruct a transfer. Informal arrangements may be difficult for a buyer to rely on.
Reconcile ownership records, options and promises of equity. Confirm title to material assets and IP, identify liens and map change-of-control or assignment provisions. Assign someone to obtain each required consent or release.
8. Compliance problems stay off the list
Unpaid or disputed taxes, worker-classification issues, missing permits, regulatory notices and cyber incidents can create liabilities or remediation costs. A clean income statement does not establish that these risks are absent.
Have the relevant advisers review open issues, supporting records and corrective actions. Keep disclosure schedules consistent with the purchase agreement and update them as required. Do not assume a file buried in the data room satisfies the agreed disclosure obligations.
Protect privilege while disclosing facts
Have counsel manage legal assessments, privileged correspondence, redactions and access. Do not upload legal advice indiscriminately or alter, backdate or destroy responsive records. Disclosure and document handling should follow counsel’s guidance.
9. Owners are not aligned
Agree objectives for liquidity, retained ownership, management roles and timing. Identify required votes and consents, and resolve shareholder conflicts early. An interested founder may not have authority to commit every owner.
10. The headline price drives the decision
Compare closing cash, earn outs, seller notes, rollover, taxes and retained liabilities. Ask who supplies the buyer’s funding and which approvals remain. Before exclusivity, agree a defined period and work plan with counsel; enthusiasm is not proof of funding.
11. Diligence displaces daily operations
Use one request log, clear document versions and named owners. Correct inconsistent answers promptly. Keep selling, collecting cash and reporting results while the deal team handles diligence. A missed forecast during the process needs a timely explanation and updated assumptions.
12. Closing and transition are an afterthought
Plan financing, consents, lien releases, key-person retention and handover before the deadline. Buyers should also budget for working capital, integration and management capacity. Seller obligations after closing, including earn-out duties or transition support, deserve early review.
A practical issue log
For each concern, record the facts, supporting evidence, potential deal impact, responsible person, next action and deadline. Have counsel direct legally sensitive assessments and disclosure decisions. Keep the log current as diligence progresses.
If a problem surfaces: establish the facts, quantify the exposure where possible, correct affected materials, discuss it with the right advisers and agree a documented action plan. Do not make unsupported assurances to preserve momentum.
Background reading
Listed for further reading, not as endorsements.
- BDO, "EBITDA, adjustments and QoE"
- BDO, "Working capital in M&A"
- BDO, "Financial and other due diligence"
- Foley Hoag, "Preparing for a sale"
- ABA, "Divorce and closely held businesses"
- AEGIS Law, "Preparing disclosure schedules"
- ABA, "Privilege in private equity transactions"
- Wyrick Robbins, "M&A letters of intent"
For information only. This material is not an offer or solicitation, or legal, tax or investment advice. Structures and terms depend on the business, counterparties and definitive documentation.