Why your EBITDA isn’t their EBITDA — and who pays the difference
Billion-dollar transactions leave patterns that most founders only see once. CFO Opinion is the view from both sides of the table.
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I have sat in enough data rooms, on both sides of the table, to recognise the pattern immediately. Good company. Real EBITDA. Clean growth story. The founder expects to spend six weeks negotiating price. They spend four months negotiating adjustments.
The final number lands materially below the opening expectation. Not because the business was not worth what they thought. Because the file told a different story than the pitch deck and the buyer’s CFO knew exactly how to price the difference.
These are the four things I see most often in that file.
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1. The contract that meant different things to different people
The largest supplier relationship was governed by an original contract and a series of amendments negotiated over several years as the commercial relationship evolved. Nobody had ever produced a consolidated version. To understand what terms actually applied, you had to read every document in sequence, identify where later amendments overrode earlier ones, and then reconcile the places where they contradicted each other directly.
That reconciliation was not straightforward. Several amendments had been drafted by different lawyers at different times with no reference to the language already in place. The result was not one contract. It was a set of documents that could be read in more than one way depending on which clause you weighted.
The minimum purchase quantities were the clearest example. The original contract set minimums against a product range that had since changed substantially, several variants in the schedule either no longer existed or had been introduced after the contract was signed. A later amendment addressed this, but introduced its own ambiguity: whether the minimums applied to units or to dollar value of sales. A further amendment could be read as resolving this, or as compounding it, depending on which lawyer was reading. Whether the minimum applied to the total contract or could be assessed variant by variant was argued both ways in due diligence with equal conviction.
The penalty provisions were clearly drafted in the original contract. The ambiguity was whether they had ever been triggered. In at least two prior years, the business had not met the minimums on any reasonable reading. No penalties had been invoiced. No penalties had been paid. No correspondence existed confirming the supplier had waived them.
The buyer’s CFO asked one question: is this a formal waiver or an informal arrangement?
There was no answer. Which meant there was a contingent liability of uncertain size sitting inside the most important commercial relationship in the business and no way to quantify it cleanly before close.
Then the exclusivity clause. The original contract granted market exclusivity by region. A later amendment listed countries. One country appeared in two regions. The exclusivity granted under the regional clause contradicted the exclusivity implied by the country schedule. The seller’s team believed exclusivity was total. The buyer’s legal team believed it was arguable. Both readings were available in the documents.
This is the specific thing that founders rarely understand about contract risk in due diligence: it is almost never about what the contract says. It is about what it does not say clearly enough to be unchallengeable. Ambiguity is not a legal problem in isolation. It becomes a financial problem the moment a sophisticated buyer has to represent that contract to their own board, their financing bank, or their auditors.
The buyer did not walk away. They escrowed a portion of the consideration pending resolution of the exclusivity question and took a price adjustment for the contingent penalty liability — calculated at the maximum possible exposure, because no other number was defensible.
CFO rule: a contract that has never been tested will be tested in due diligence. The question is whether you find the ambiguity first or the buyer does.
2. The EBITDA that a Big Four firm couldn’t quite defend
The accounts were reviewed. Not by an internal team — by one of the largest audit firms in the world. This is where it gets instructive, because founders often assume that external review resolves the EBITDA question. It doesn’t. It can make it worse.
The issue wasn’t the quality of the review. It was consistency. The approach to certain adjustments — how bonuses were treated, how specific cost items were classified, which one-offs were excluded — had shifted year to year. Each year’s treatment was defensible in isolation. The auditors had signed off each one. But the cumulative effect of those inconsistencies was an operating margin that moved in ways the underlying business didn’t warrant.
In one year the margin looked strong. The following year it looked weak. The year after, strong again. Not because the business had changed dramatically. Because the accounting had.
The buyer’s CFO built a like-for-like margin bridge across four years. The question they were trying to answer was simple: what is the normalised, sustainable operating margin of this business? The answer should have been straightforward. Instead it required a conversation about methodology that the vendor’s advisors couldn’t fully resolve because the methodology had genuinely varied.
The consequence was specific and financial. The initial earnings figure being used to anchor the multiple looked, on any consistent treatment, significantly more proforma than actual. The buyer’s CFO didn’t argue about which year’s methodology was right. They argued that the uncertainty about the real number justified a lower entry multiple — and they had the margin bridge to support it.
This is the version of EBITDA risk that sophisticated buyers exploit most effectively. Not fraud. Not error. Inconsistency. Because inconsistency creates a range, and when a buyer has a range, they anchor to the bottom of it.
CFO rule: external review confirms the numbers. It doesn’t protect you if the methodology behind them shifts. Consistency of approach across years is worth more in a sale process than optimisation in any single year.
3. The financials that weren’t ready for the room
The business had never had its financials audited. The accounts had been prepared internally, filed for compliance purposes, and used to run the business. They were not wrong, exactly. But they had not been prepared to an external standard, and in several areas they did not follow GAAP consistently.
This would have been entirely manageable, if anyone had identified it before the process started.
Nobody had. The company entered the sale process on the advice of an M&A advisor focused on the transaction, without first taking structured financial and legal guidance on process readiness. The assumption was that the accounts were sufficient. They were not.
The buyer’s financial due diligence team identified the gaps early. Revenue recognition in one business line did not meet the standard a buyer could represent to their own auditors. Several cost classifications required restatement. The prior year comparatives, once properly prepared, told a materially different story about margin progression than the unadjusted accounts had suggested.
The process did not collapse. But it stopped. The seller had to commission a formal audit and partial restatement while the buyer waited. Weeks became months. The exclusivity window was extended under pressure. Legal and advisory costs accumulated on both sides. And the buyer, now aware that the numbers they had been shown required significant adjustment, repriced their uncertainty into the final offer.
The direct cost of the audit was significant. The indirect cost: lost time, extended process, a buyer whose confidence in the financial information had been compromised before the real negotiation began was larger. All of it was avoidable. Not by being a bigger or more sophisticated business, but by getting the right guidance before launching the process rather than during it.
CFO rule: entering a sale process is not the starting gun for financial preparation. By the time a buyer’s team is in your data room, it is too late to fix what should have been fixed 18 months earlier.
4. The regulatory cost that became a judgment call on management
The regulatory position itself was not the problem. The problem was the number attached to it — and what happened when it was challenged.
The seller’s team had made an assumption about the cost to resolve a specific compliance requirement. The assumption was aggressive. Not unreasonable as a starting position, but aggressive and when the buyer’s CFO stress-tested it in due diligence, the seller’s team held the number.
That decision to defend a forward-looking cost estimate under pressure, without evidence that would satisfy a CFO-level challenge changed the entire character of the conversation.
It wasn’t about the regulatory cost anymore. It was about whether the management team’s forward-looking assumptions could be trusted.
The buyer’s CFO then went back through every other forward-looking number in the model. The plant expansion capex. The margin improvement from the new product line. The working capital assumptions in the three-year plan. Each of those numbers had been presented as management’s best estimate. After the regulatory conversation, they were all re-examined through a different lens: is this team the kind of team that holds a position because they’ve done the work, or because they don’t want to concede ground?
The plant expansion estimate, which had been accepted without significant challenge in the first week of diligence, was reopened. The revised buyer assumption was materially higher. It affected the investment case.
This is the compounding effect that founders rarely model when they think about regulatory risk. The direct cost is one number. The credibility discount applied to every other forward-looking assumption is a different, larger number and it’s invisible until you’re inside the process.
CFO rule: in due diligence, how you defend a number matters as much as the number itself. An aggressive assumption held without evidence doesn’t signal confidence. It signals that the other assumptions might need the same scrutiny.
What these four things share
None of them were fatal. The deal completed.
But value transferred from the seller to the buyer across each of these four points — not through negotiation, but through preparation. The buyer’s CFO did not negotiate these adjustments. They presented what the file showed. The seller’s advisors contested some and conceded most, because the file was the file.
The businesses that sell at the top of their range aren’t always the best businesses. They’re the businesses whose file matches their story — where the financials have been prepared to a standard that survives external scrutiny, where the accounts say what the pitch deck says, where the contracts mean what both parties believe they mean, where risks are documented before the buyer finds them, and where forward-looking assumptions have been stress-tested before someone else does it in a room you can’t control.
That preparation doesn’t happen in the data room. It happens 18 to 24 months before anyone signs an NDA.
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