redactedThere are two numbers in every sale of a business. The earnings you report, and the earnings that survive a buyer's review. Most selling owners never learn the gap between them until a buyer is sitting across the table, which is about the worst possible time to find out. That gap is what this newsletter is all about. This is the first issue of The Buyer's-Eye View. I'll cover the numbers behind growing, scaling, buying, and selling a business, explained the way I'd explain them to a friend who owns one. I'm number-heavy by nature, but I'll work at keeping it plain. I'm writing for both sides of the table: the owner who will sell one day, and the buyer putting their name on a deal now. A quick story first, because it's the reason I wanted to get into deals. Years ago, I watched my dad sell the business he spent decades building alongside my mom. It didn't go badly, he ended up with a quality team at his side and ultimately a positive exit. But the years around that sale were some of the hardest of his life, because he carried much of it alone at the beginning, particularly the planning in the years ahead of his exit. I didn’t know it then, but it was those late nights he spent crunching numbers trying to figure out what it meant that would shape a desire to help facilitate deals across the finish line. I've spent my whole career analyzing financial statements, and it's still the part of the job I enjoy most. Done right, they tell a story: where the business has been, where it is now, and if you read closely, where it's going. The catch is that the statements almost never give up the whole story on their face. You have to dig. I did that digging on both the buyer's and the seller's side of deals for years, more than one hundred quality of earnings reviews, before I stepped away from transaction work to feed professional curiosity. The deals drew me back. So did the chance to get owners ready for the biggest transaction of their lives. Nothing in finance moves like a deal, and nothing tests the story financial statements tell like a buyer and a bank writing a check. I'm here to break down that story, whichever side of the table you're on. One thing all those reviews taught me: a buyer isn't really reading your financials. They're deciding whether they believe the story the numbers tell. Numbers without context are just numbers. The whole job is turning yours into a story a buyer believes. So here's what they're actually doing. When a serious buyer takes interest in a target company, they order what's called a quality of earnings review, the same review I spent years running. It's not an audit or a valuation. It's a buyer's-eye look at your books, and it answers one question: are your earnings real? The price at LOI is set on what you claim as earnings. What you actually walk away with is determined by what survives the quality of earnings review. Owners often lose money in the gap. The point of this issue is to show you the four things a buyer checks, so they cannot surprise you. There is no mystery. And all of it is fixable, if you start early enough. 1. Your real, provable earnings. Your tax return is built to show as little profit as possible. But you want to illustrate the opposite come time to sell. So the first job is adding back the costs that won't follow you out the door: the above-market salary you pay yourself, personal expenses run through the business, a one-time legal bill, rent you pay yourself above what the building is worth. Every business has a few. Buyers have seen them all. Those add-backs are real money on the price. But only if you can prove them. Every one needs a document, a reason, and a number you can defend; the add-backs issue coming up goes deep on all three. A dollar you add back without proof comes straight out of the price when the buyer pushes. And it cuts both ways: if you underpay yourself, a buyer adds the cost of your replacement back in and your profit drops, because someone has to do your job after you're gone. 2. Whether the revenue is real and repeatable. A buyer separates the sales that come back every year from the revenue that only happened once. Recurring is more valuable. They also take a hard look at customer concentration. If sales from one or two customers are too big of a share, that’s risk, and added risk discovered during diligence typically knocks down the price. 3. Bank statements that match the books. Earnings on the books and cash in the bank are not always the same thing. The revenue you reported should match the deposits in your bank, and the cash you spent should match the expenses on the income statement. If they don't match, we'll need a clean reconciliation to provide a buyer comfort that the bank statement is telling the same story as the financial statement. 4. The working capital the business runs on. Every business needs everyday operating cash to run: what customers owe you, the inventory on the shelf, less the bills you owe your vendors. In a deal that's called working capital, and a buyer expects it to come with the business the way a house comes with the furnace. So we analyze how much the business has actually needed, month by month, across the trailing year. Here's what an untimely diligence discovery can mean in dollars. Let’s say you tell the market your earnings are $2.5M. The review then trims it to $2.2M, because a few add-backs weren't documented or supported and some costs were actually recurring. At a common multiple for a business of this size, say six or seven times, that $300,000 turns into a swing of nearly $2.0M in price. Nothing about the business changed, just the earnings you could prove. And this isn't rare. Roughly one in three signed deals falls apart somewhere in diligence, and financial findings like these are the most common reason. Now the good news. The buyer’s diligence process is not a trap or a buyer’s scheme for a lower price. You can even prepare for it. The owners who aren’t surprised during the buyer’s due diligence are the ones who had an honest read a year or two before they needed it. They built the case for their profit before a buyer ever asked and cleaned up the messy stuff while they still had time. Deals with fewer discoveries during diligence are more likely to close on time, limiting the seller’s deal fatigue. Whether you sell in two years or ten, clean numbers make the business stronger right now and worth more when you decide it's time. If you're a year or two from selling, the move is simple: see your numbers the way a buyer will, before a buyer does. That's a sell-side quality of earnings run early, a fixed-fee, roughly two-week look that hands you the punch list while you still have time to fix it. Reply to this and I'll tell you honestly whether it's worth doing yet. Buying a business? Similar review but on your side of the table: a fixed-fee, buy-side quality of earnings on the deals the big firms won't touch, or will only touch for a fee bigger than the deal deserves. Brokers, CPAs, and lenders: if you have a client heading into a sale or an SBA loan, this is the work that keeps a deal from dying in diligence. Send them LIMESTONE's way. Coming up in the series: the add-backs buyers accept, the ones they strip, and the documentation that makes them stick. I'm Ryan Anoskey, CFO Partner at LIMESTONE, a CPA who spent years on the buyer's side of the table. Now I'm on yours.