9d (edited) • Deal Flow & Opportunities
Part 2/3 - 3 places where profit gets manipulated
A business can show great profit on paper and still be a bad acquisition.
The danger is not always in the revenue.
Sometimes it’s hidden in the way the profit is presented.
Here are 3 areas I would watch closely :
1. EBITDA adjustments can become creative
Normalized EBITDA is useful.
It removes unusual expenses or owner-specific costs to show the real earning power of the business.
But sometimes sellers get very creative.
Example:
Accounting EBITDA: $90K
Seller-adjusted EBITDA: $400K
That gap needs to be reviewed line by line.
What to ask for:
A detailed list of every EBITDA adjustment.
What to watch:
Ask this question for every adjustment:
“Will this expense truly disappear after I buy the business?”
If the answer is no, it should not be fully added back.
2. Deferred capex is a hidden bill
Capex means capital expenditures: trucks, equipment, machinery, tools, vehicles, major replacements.
A seller can delay investments for 2 or 3 years before selling.
The result?
The business looks more profitable than it really is.
But after closing, you inherit the bill.
Example:
A company shows $280K in EBITDA, but the fleet needs $380K of vehicle replacements in the next 18 months.
That changes the whole deal.
What to ask for:
A full asset list with age, condition, replacement timeline, and expected replacement cost.
What to watch:
Recalculate profit after subtracting the annual capex needed to keep the business operating at the same level.
3. Accounts receivable may not be worth full value
Accounts receivable is money customers owe the business.
But not all receivables are equal.
If a customer invoice is 10 days late, that’s one thing.
If it’s 120 days late, that’s different.
What to ask for:
The accounts receivable aging report.
What to watch:
If 25% of receivables are older than 90 days, that’s a problem.
Receivables older than 90 days may not be worth 100 cents on the dollar.
They may be worth 60 or 70 cents — sometimes less.
Simple takeaway
Profit is not just what the seller says it is.
You need to ask:
“What profit will still exist after I take over?”
That is the number that matters.
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Part 2/3 - 3 places where profit gets manipulated
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