The number on the letter of intent is a starting position. What reaches the seller’s account months later has passed through a working capital true-up, a debt-like items schedule, an escrow holdback, and sometimes an earnout that will not resolve for another two years.
Accounting and finance professionals sit inside every one of those adjustments. Not as deal lawyers. As the people who know what the numbers mean.
Working Capital Targets
Nearly every private company purchase agreement sets a target level of working capital the business is expected to carry at closing. Deliver less than the target and the price adjusts down. Deliver more and it adjusts up.
The target usually gets built off a trailing average, which means the historical periods selected and the accounting policies applied to them drive the outcome. A target constructed from months that happened to include unusually fast collections becomes difficult to hit on the closing date.
Definitional questions cause more damage than the arithmetic does. Whether deferred revenue sits inside or outside the calculation. How accrued bonuses get treated. Whether the same policies used to build the target get applied to the closing statement (they often aren’t, and that’s where the argument starts). These are the items that end up in front of a neutral accountant months after everyone shook hands.
Debt-Like Items
Most private deals are structured on a cash-free, debt-free basis. The buyer takes the business without its cash and without its funded debt, and the seller keeps both.
The real negotiation is about what else gets treated as debt. Capital leases. Deferred compensation. Unpaid taxes. Accrued paid time off. Customer deposits. Unfunded pension obligations. Outstanding earnout payments owed from the seller’s own earlier acquisitions.
Every line that lands on the debt-like schedule is a dollar-for-dollar reduction in proceeds. Sellers who have never seen such a schedule before tend to see it late, after the headline number has already been socialized to a spouse or a board.
Earnouts
An earnout defers part of the price and conditions it on post-closing performance. It exists to bridge a valuation gap between a seller who believes the forecast and a buyer who does not.
It also creates a measurement problem that nobody feels until the first calculation period closes. The earnout gets computed on financial results produced by a business the buyer now controls, using accounting policies the buyer may change, inside a cost structure the buyer may reallocate. Agreements that hold up specify the metric precisely, fix the accounting policies used to compute it, and address what happens when buyer decisions suppress the measure.
Contingent consideration also carries accounting consequences for both parties after closing.
What Reps and Warranties Are Actually Doing
Representations and warranties allocate risk. Indemnification provisions and escrow holdbacks are the enforcement mechanism behind them.
Finance and accounting professionals get pulled into the disclosure schedules, where exceptions to the representations get listed and supported. A representation that the financial statements were prepared in accordance with GAAP consistently applied is a live exposure at a company that has been running on modified cash basis or has been inconsistent about accruals. Disclosing that in the schedules is a different outcome than discovering it in a post-closing claim.
Concentration and What Sits Off the Balance Sheet
Customer concentration compresses value. Vendor concentration does the same thing from the supply side, and it gets noticed less often.
Diligence also surfaces items that never made the balance sheet: unrecorded liabilities, related party arrangements, side letters, contingencies, worker classification exposure. Improper transfers of company assets or funds in the period before closing fall into the same territory, and buyers look for them specifically.
The Quality of Earnings Question
Buyers rarely take reported EBITDA at face value. A quality of earnings analysis rebuilds it, stripping out items that will not recur under new ownership and adding back items that were understated.
Owner compensation above or below market rates. Personal expenses running through the business. One-time legal settlements. Rent paid to a related party at a rate nobody would negotiate at arm’s length. Revenue recognized on a basis the buyer’s auditors would not accept. Each adjustment moves EBITDA, and in a deal priced on a multiple, every dollar of EBITDA movement is several dollars of purchase price.
Sellers who commission their own analysis before going to market tend to control that conversation. Sellers who see the buyer’s version first tend to defend it line by line.
After the Signing
Post-closing work runs longer than most sellers expect. Accounting controls under new ownership. Financial reporting priorities that differ from what the company ran on before. Escrow release timing. Disputes over the closing statement itself, which the purchase agreement typically routes to an independent accounting firm rather than to litigation.
The professional who prepared the closing statement is usually the one who defends it.
Where the CPA Adds the Most
Involvement that begins at the term sheet stage changes outcomes more than involvement that begins at closing. The working capital target, the debt-like definitions, and the earnout metric are all set in the purchase agreement, and all three are financial questions being negotiated in a legal document.
By the time the agreement is signed, those definitions are fixed.
Related Course
Private Company M&A for Accounting and Finance Professionals (PMA2) covers the practical role of accounting and finance professionals in buying or selling a private company: deal basics including customer and vendor concentration, possible liabilities and off-balance sheet issues, purchase agreement terms affecting the numbers such as working capital targets, debt-like adjustments and earnout payments, common deal protections including representations, warranties and indemnification, and post-closing matters including accounting controls, escrow holdbacks, and buyer-seller disputes. Two credits in Finance at the overview level.
Source
– Surgent CPE, PMA2 course overview, major topics, and learning objectives: surgentcpe.com/cpe-courses/private-company-m-and-a-for-accounting-and-finance-professionals-PMA2