Your books survive a stranger

When a buyer gets serious, they send in an accountant. This is called a quality-of-earnings review, or QofE. For about three to six weeks, a team you have never met takes your books apart and builds them back up the way a buyer needs to see them.

Here is what they do. They match your tax returns to your management financials. They check your bank statements. They test whether the revenue you booked was really earned. And they go through every add-back you proposed, one by one.

Add-backs are the personal costs you run through the business: the boat, the car lease, the country club, the kids on the summer payroll. Your banker adds these back to profit before the sale, because the argument is that a new owner would not pay them. The buyer's team builds their own version. Across the deals Cordis has reviewed, buyers allow about 60% to 75% of the add-backs a seller first proposes.

What they reliably allow: one-time legal or deal fees, owner pay above the market rate for the job (added back up to market), and a clean loss from a product line you shut down. What they reliably throw out: personal vehicles, club memberships, family members who are not really working, and any expense you cannot defend in a 90-second answer. The boat fails that test. So does the dog. (We have seen a dog on the books. Twice.)

The dollars you lose on thrown-out add-backs are not the worst part. The worst part is what it does to your credibility.

Say the team throws out $180,000 of add-backs. Two things happen. Profit drops by $180,000, and the multiple gets applied to the lower number. On an 8x multiple, that is $1.4M off the price. That hurts, but it is bounded. The second hit is trust. The buyer's committee reads that the seller pushed hard on the numbers. Now they check everything else twice: the working capital, the concentration story, the margin dip. They have not decided you are dishonest. They have decided your numbers need independent checking, and that the checking will probably turn up more.

Buyers do not punish you for the boat. They punish you for the signal that you thought the boat would pass. That signal changes how they read everything else.

This is where about 1 in 3 deals gets its price cut after the handshake. Not because the business is bad. Because the books did not survive a stranger.

The fix is cheap, and it is early. Two years before a sale, clean the books. Find every line that is personal, work out the after-tax cost of removing it, and remove it. Pay the car lease yourself. Take the kids off the payroll if they are not really working. Drop the boat and the dog. You will pay more personal tax for two years, usually $60K to $120K a year. What you get back at sale is 10x to 30x that. The math is not close.

There is a quieter benefit too. Most deals die at what we call the false summit. The owner thinks the readiness work is done, the offer lands, and then the diligence team asks for documents that do not exist. Cycle times. Gross margin by service line. The contract that was only ever verbal. The promotion nobody was told about. Well-run and well-documented are different things, and the buyer prices the documented version.

An owner who has cleaned the books knows the books are clean. They sit differently in the room. They are not bracing for the disallowance talk or hoping the team misses something. They are showing a business whose numbers mean what they say. Buyers reward that, and the price holds.