Managing through corrections in DD?

April 07, 2025

by a searcher from Columbia University in New York, NY, USA

I am working through due diligence on a relatively smaller bolt-on. We recently learned that some of the addbacks were inaccurate, and there's a broker on this one whose stated position is that 'we don't like discussing the addbacks'.

I like the company, and would prefer to close than pass. I wonder if any here have stories or guidance on approaching a repricing without it looking like a retrade.

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Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA

Thanks for the tag. The reality I have faced is that most deals have some level of add back overstatement. This can range from the slightly aggressive to the absolutely egregious and you are in the best position to say where it lies on this spectrum and what you can live with. I also tend to see sellers anchored to a number and even justified change in pricing is taken very poorly and feels like a re-trade.

If you do delay the tough conversation, I think that can be helpful to get a deal across the finish line when you have momentum but does expose you to increased dead deal cost.

Knowing that it is a bolt on instead of a first acquisition, can you share the current salary you are paying for the role you would need to replace, showing their number is not accurate? You may even be able to "split the difference" to get something from the seller and put it in a more comfortable range for yourself.

Some questions I would be asking myself:
-What are the overstatement affects on both EBITDA and value?
-Where is my current offer in the range of reasonable valuations? Is this a 3X deal or a 6X deal?
-Is the difference in value worth walking away over?
-How competitive has the selling process been. Was it an open process with multiple offers or am I the only person they are talking to?

Reply by a searcher
from Temple University in Philadelphia, PA, USA

Rather than looking at add backs from a valuation point of view, I would suggest looking at the add backs on a relative scale and how they will impact the business in the years to come. In other words, Let's you are concerned about $50k of add backs worth $150k in price (small deal so 3x). That's roughly $18k year difference in your loan. Is it worth it to blow up a deal for that? Will this bolt on allow you to increase the overall value beyond the additional $150k of cost?

That said, you need to bring them up sooner than later. It may be helpful to illustrate which particular add backs you aren't comfortable with, why you believe they should not be added back, and ask them to prove otherwise. If they aren't willing to discuss them, it's really all about your gut feel. Are they really looking for that extra $150k (maybe) or is there something else they aren't telling you?

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