How risk moves from the data room into price, terms and deal structure.
Updated July 2026
A signed heads of agreement can feel like the finish line. In reality, it is usually the point at which the buyer begins testing whether the commercial story can support the price.
During due diligence, buyers do not need to uncover a disaster to seek a discount. Uncertainty alone can be enough. If earnings cannot be reconciled, customer relationships are not transferable, or the working capital position is unclear, the buyer will try to move that risk back to the seller.
The result may not appear as a simple reduction in the headline price. It can emerge through a lower maintainable EBITDA, a reduced multiple, deferred consideration, an earn-out, tighter warranties, a holdback, or a completion adjustment.
| Key takeaway: Most due diligence discounts are risk-transfer mechanisms. The best defence is not a more aggressive sales story; it is a better evidence pack prepared before exclusivity. |
1. The maintainable earnings case does not reconcile
A buyer will usually compare management accounts, statutory financial statements, tax returns, BAS records, bank activity and the general ledger. If those sources tell different stories, the buyer may reduce the earnings base before debating the valuation multiple.
Common pressure points include inconsistent revenue recognition, late journals, unexplained margin movements, related-party entries and a current-year result that cannot be tied back to source records.
Seller preparation: build a monthly earnings bridge for at least the last three financial years and the current year-to-date period. Show how reported profit converts to normalised EBITDA and explain every material movement.
2. The add-backs are too aggressive
Add-backs are claims, not entitlements. A buyer will test whether each expense is genuinely non-recurring, non-operating or avoidable under new ownership. The moment a supposedly one-off cost appears every year, the adjustment becomes difficult to defend.
Owner remuneration, family wages, vehicles, travel, related-party rent and restructuring costs often attract the most attention. Buyers will also look for negative normalisations, such as an under-market salary, under-market rent or deferred expenditure that must continue after settlement.
Seller preparation: use a line-by-line schedule that identifies the ledger account, amount, period, rationale and supporting document. Apply normalisation symmetrically; remove one-off gains as well as one-off costs.
3. Revenue is concentrated, informal or tied to the founder
Revenue quality matters as much as revenue volume. A business may be profitable and still attract a discount if a small number of customers represent a large share of gross profit, contracts can be terminated quickly, or the founder personally owns the key relationships.
Where continuity cannot be demonstrated, buyers may reduce the multiple or make part of the consideration conditional on customer retention. Pipeline value is also treated differently from contracted backlog: an opportunity is not the same as enforceable revenue.
Seller preparation: map revenue and gross profit by customer, contract status, tenure, renewal history and relationship owner. Move key relationships into the broader team before the sale process begins.
4. The business is more owner-dependent than the information memorandum suggests
Owner dependency is often uncovered through operational questioning rather than financial analysis. Buyers ask who sets prices, approves expenditure, handles difficult customers, prepares tenders, holds licences and resolves delivery problems.
If the founder is performing several critical roles, the buyer may insert a replacement salary, require a longer handover, retain part of the price, or insist on an earn-out. That can affect both the earnings base and the deal structure.
Seller preparation: document decision rights, build a credible second layer of management, transfer key relationships and record the processes that currently sit in the owner’s head.
5. The working capital target has not been modelled properly
A strong headline enterprise value does not guarantee the same cash outcome at completion. Most lower mid-market transactions require the seller to deliver a normal level of working capital. If actual working capital falls below the agreed target, the difference is commonly deducted from the equity proceeds.
Seasonality, aged receivables, inventory build-ups, supplier timing and unusual pre-completion collections can all distort the calculation. A poorly defined working capital peg creates an avoidable last-minute negotiation.
Seller preparation: model monthly net working capital over at least 24 months, identify seasonal patterns and agree the definitions, target and accounting policies in the heads of agreement wherever possible.
6. EBITDA does not convert into cash
EBITDA is a useful operating metric, but it is not free cash flow. Buyers will test maintenance capital expenditure, fleet and plant replacement, software investment, debtor collection, inventory turns and any cash costs treated as exceptional.
If the business has been under-investing to present a stronger profit result, the buyer may reduce the multiple, adjust the forecast or classify certain items as debt-like at completion.
Seller preparation: separate maintenance capex from growth capex, explain the replacement cycle and provide a credible cash conversion analysis.
7. Legal, employment, tax or asset-transfer issues appear late
Lease assignment problems, PPSR registrations, unclear asset ownership, expired licences, employee underpayments, contractor classification issues and tax arrears can all slow the transaction or change the risk allocation.
The buyer may respond with conditions precedent, specific indemnities, an escrow or a price holdback. Even where the issue is fixable, late discovery weakens the seller’s leverage.
Seller preparation: complete vendor-side legal, employment, tax and PPSR checks before the buyer enters the data room. Resolve straightforward defects and prepare an explanation for anything that cannot be removed.
8. The data room creates doubt rather than confidence
A disorganised data room can turn manageable issues into credibility problems. Duplicate versions, inconsistent schedules, missing documents and slow answers encourage the buyer to widen its testing because it no longer trusts the first response.
Seller preparation: maintain one controlled data room, appoint a single Q&A owner, keep a version register and reconcile every schedule to the same financial baseline.
How buyers convert findings into deal terms
| Due diligence finding | Typical buyer response | Seller preparation |
|---|---|---|
| Earnings cannot be verified | Reduce maintainable EBITDA or apply a wider risk discount | Reconciled financial pack and earnings bridge |
| Customer or owner dependency | Lower multiple, retention condition or earn-out | Contract evidence, relationship transfer and management depth |
| Working capital uncertainty | Completion accounts adjustment or conservative peg | Monthly model, agreed definitions and seasonal analysis |
| Legal or compliance exposure | Indemnity, holdback, escrow or condition precedent | Vendor due diligence and early remediation |
| Weak disclosure discipline | Broader diligence and reduced trust | Controlled data room and consistent Q&A process |
The pre-diligence playbook
- Reconcile three to five years of financial information and the current year-to-date period.
- Prepare a defensible normalisation schedule with evidence for every adjustment.
- Map customer concentration, contract status and relationship ownership.
- Model normal working capital and define debt-like items before heads of agreement.
- Complete legal, tax, employment and PPSR checks before opening the data room.
- Agree an internal response protocol so the deal team speaks with one voice.
Due diligence does not create the underlying risk. It exposes it at the point where the buyer has leverage and the seller has already invested time, cost and momentum in the transaction. The objective of pre-sale preparation is to resolve the issue earlier – or, where it cannot be removed, to price and explain it before the buyer uses it to re-trade the deal.
| Prepare before the buyer controls the process
Expert Business Advisors helps owners build a defensible sale position, prepare the data room and manage the financial and commercial workstreams through due diligence. |
Editorial note and disclaimer: This article provides general information about Australian business sale processes. It does not constitute legal, tax or financial advice. Transaction outcomes depend on the facts, documents, buyer, structure and negotiated terms.
Selected references
– Australian Government – Personal Property Securities Register
– Australian Taxation Office – Market valuation for tax purposes
– Expert Business – Professional and transaction advisory services
