M&A Advisory

Sort every proposed adjustment into its category and hold each to its own standard. Accounting corrections (cutoff errors, unrecorded liabilities, reserve releases flattering a period, cash-to-accrual conversions) are not negotiable addbacks; they are restatements of the baseline. Normalizations (owner compensation to market, related-party arrangements repriced, discontinued products removed) require evidence of the market rate or the discontinuation. One-time items earn the label only if they genuinely do not recur; litigation that settles every other year is a cost of business. Pro forma and run-rate adjustments (new contracts annualized, synergies, price increases) carry the most risk and the least support, and a QoE separates the contracted from the hoped-for. The output is a bridged EBITDA with each adjustment quantified, sourced, and rated by quality, which is the number the deal should actually price on. A proof of cash underneath it reconciles reported revenue and earnings to bank activity, the fastest way to surface problems management did not mention.

What we do: We deliver the adjustment-by-adjustment EBITDA bridge with quality ratings and a proof of cash underneath it.

Set the working capital peg on a methodology, not a number: typically a trailing average (twelve months where seasonality matters) computed on a defined basis, with the definition enumerating what counts, consistent GAAP applied consistently with past practice, specific reserves methodology, and explicit treatment of the gray items (deferred revenue, customer deposits, accrued bonuses). The closing true-up then measures actuals against the peg on that same basis, with a dispute mechanic naming an independent accountant; most true-up fights are definition fights someone could have prevented in drafting. Diligence findings route three ways: into price (baseline EBITDA corrections), into the peg and definitions (recurring balance-sheet issues), or into specific indemnities and the reps (contingent exposures, tax positions), increasingly backed by R&W insurance whose underwriters read the QoE. We sit with counsel on the definitions, because the accounting exhibit is where deal value quietly moves.

What we do: We set the peg methodology, draft the working capital definitions with counsel, and support the closing true-up on the same basis.

Build the schedule from the balance sheet outward. Unambiguous: funded debt, capitalized interest, PIK accruals, bank overdrafts. Usually debt-like and usually contested: unpaid transaction bonuses and severance, deferred compensation, unfunded pension and post-retirement obligations, income taxes payable for pre-close periods, earnout obligations from the target’s own past deals, aged or stretched payables beyond terms, customer deposits, and deferred revenue where the cost to serve is real. Finance leases typically count; operating lease liabilities post-ASC 842 are a drafting decision that must be made explicitly, because silence invites a dispute. Each item also has to be kept out of working capital if it sits in net debt, or it double-counts. The deliverable is a net debt schedule with support for each item and a position on each gray one, prepared before the other side prepares theirs.

What we do: We build the net debt and debt-like schedule with support for every item and a position on every gray one, before the other side does.

Coordinate the valuation of identified intangibles (customer relationships, technology, trade names, backlog) with assumptions that reconcile to the deal model, because auditors compare them. Apply ASU 2021-08: acquired contract assets and deferred revenue come over at ASC 606 carrying amounts, not haircut fair value, so the post-deal revenue dip of the old model is gone and the diligence view of deferred revenue should anticipate that. Recognize deferred taxes on the book-tax differences the allocation creates, distinguish stock from asset deals for tax basis, and expense transaction costs as incurred. Run the measurement period with discipline: up to one year, only for facts existing at the acquisition date, with adjustments booked against goodwill and the earnings effect recognized currently; later discoveries are error corrections, not adjustments. The opening balance sheet package, allocation memo, valuation report, tax mapping, becomes the first-year audit’s central exhibit, so we build it as one document set.

What we do: We prepare the allocation, coordinate the valuation, and deliver the opening balance sheet package the first-year audit tests.

Classify first: an earnout payable to selling shareholders regardless of continued employment is contingent consideration, recognized at fair value at close and, when liability-classified, remeasured through earnings each period, so beating plan creates expense, an outcome to model, not discover. An earnout that is forfeited if the seller-employee leaves is compensation under ASC 718, expensed over the service period no matter what the purchase agreement calls it; automatic-vesting-on-termination features and payments proportional to ownership push back toward consideration, and the analysis weighs all the indicators. Share-settled earnouts add the ASC 815-40 equity-versus-liability test on top. In an asset acquisition the model changes again, with contingent payments generally recognized as resolved. We put the classification memo in front of the drafting, because one sentence in the agreement, the employment condition, moves millions between purchase price and payroll expense.

What we do: We classify the earnout before the agreement is signed, so consideration and compensation land where the parties intended.

Define the perimeter first, legal entities, sites, product lines, because everything follows from it. Attribute the directly identifiable activity, then allocate shared corporate costs (executive, finance, IT, facilities) on rational, documented bases per SAB Topic 1.B, with the methodology disclosed and the limitations stated: carve-out results are not what the business would have looked like standalone, and the notes say so. Present parent’s net investment in place of conventional equity, decide the treatment of centralized cash and parent debt on the facts of how the business was financed, and compute income taxes on a separate-return basis. Where the transaction is public-facing, an S-1, an S-4, or a spin-off Form 10, the statements are audited and the allocation methodology becomes a diligence and comment topic of its own. We build the carve-out model, the allocations, and the disclosures as one auditable package.

What we do: We build the carve-out model, the cost allocations, and the disclosures as one auditable package.