In SMB acquisitions, what hurts buyers most isn’t a sneaky clause or a bad market week. It’s the quiet assumptions you never tested. They sneak into your model, your LOI, and your lender package—and then show up in the first 100 days as cash strain, churn, or a surprise phone call from your banker.
Here are the assumptions that cost buyers real money, why they fail, and the simple checks that keep you out of trouble.
“The numbers are basically right.”
When a seller’s Adjusted EBITDA is within shouting distance of your target, it’s tempting to call it good. That’s how buyers overpay.
Why it fails
- Add-backs rely on costs you’ll put back (replacement labor, reinstated marketing).
- Revenue timing blurs billings and recognition.
- One “strong” quarter gets annualized.
What to do
- Paper-first validation: every material add-back tied to payroll, invoices, or GL detail.
- Replacement-cost logic: price the GM/controller you’ll actually hire.
- Run-rate check: restate a trailing year to match delivery and align direct costs.
- Decide on materiality: if it won’t move EV or DSCR, don’t fight it; focus on the big rocks.
“The seller will stay engaged after close.”
Maybe. Maybe not. Motivation drops fast once the wire hits.
Why it fails
- No clear scope, hours, or outcomes for transition.
- The seller assumes “a few calls” is enough.
- You assume institutional knowledge lives anywhere other than the seller’s head.
What to do
- Define it in the LOI: weekly hours, duration, responsibilities, and deliverables (SOP handoff, customer introductions, vendor transitions).
- Tie dollars to transfer: modest holdback or seller note to keep skin in the game during the handoff.
- Front-load knowledge capture: record screenshares, build a basic internal wiki, and document pricing and exception rules.
“Bank approval means it’s a good deal.”
Lenders protect the bank. You protect you.
Why it fails
- Bank models start with seller Adjusted EBITDA and “typical” working capital.
- Underwriting assumes steady-state operations, not owner dependency or brittle systems.
- The bank is fine with DSCR on paper while you inherit a business you can’t run at that margin.
What to do
- Share your validated exhibits early: normalized EBITDA and a trailing working capital peg with collar.
- Run an operator’s checklist: key person risk, customer transferability, system fragility.
- Align structure to risk: if coverage looks thin, shift value into a seller note or retention-linked earnout.
“We’ll fix it after close.”
You can fix a lot. Cash flow cannot fix everything at once.
Why it fails
- Deferred maintenance, underpriced accounts, and system gaps show up all at once.
- Day-one liquidity is thinner than modeled because the peg was wrong—or because AR ages the moment you own it.
- Team capacity to absorb change is limited.
What to do
- Sequence changes: stabilize service and revenue first, then pricing discipline, then systems.
- Budget fixes in the model: maintenance capex, wage resets, basic IT.
- Structure for runway: a bit more seller note and a bit less cash at close beats heroics with no cushion.
“Recent growth will continue.”
Sometimes growth is real. Sometimes it’s one whale or pent-up demand.
Why it fails
- Concentration risk hides under a rising tide.
- Price increases masquerade as volume gains.
- Channel or owner-led sales do not scale.
What to do
- Two-number concentration check: largest customer % and top-3 %.
- Cohort and margin view: gross profit by customer or product; verify that growth is profitable and repeatable.
- Contract reality: renewal dates, assignability, termination rights.
- Price with the multiple, protect with structure: haircut the multiple and add a simple earnout tied to gross profit from named accounts.
“Nothing major came up in diligence.”
Silence is not safety. It may be a scope issue.
Why it fails
- Diligence looked at what was easy, not what was risky.
- Advisors worked in parallel without a single owner or weekly checkpoints.
- Issues lists arrived too late to influence terms.
What to do
- Scope to value movers: revenue quality, add-backs, working capital, and any known exposures (sales tax, warranty).
- Insist on an issues list in week one: reopen terms early if assumptions shift.
- Run a one-page close plan: owners, dates, and status across QoE, legal, lender, and consents.
“The model is conservative enough.”
Models tell stories. Debt service tells the truth.
Why it fails
- Single-case modeling hides thin coverage.
- Working capital swings are muted or ignored.
- No sensitivity to losing the top customer, a price reset, or a modest wage correction.
What to do
- Downside case as default: 10–15% EBITDA reduction, normalized working capital, and realistic payroll.
- Drop test: remove top-account gross profit and see if DSCR holds.
- Cash cadence: layer timing of AR, AP, payroll, and debt service to catch monthly pinch points, not just annual math.
A practical checklist to replace assumptions with proof
Use this as your pre-LOI and early diligence starter.
Numbers and earnings
- Seller add-back schedule with documents attached.
- Replacement-cost summary for owner/family roles at market pay.
- 24 months of monthly P&Ls; restate for revenue timing if needed.
- Maintenance capex vs. depreciation.
Customers and revenue quality
- Top-10 customers with terms, renewal dates, and who owns each relationship.
- Largest % and top-3 %; contract vs. at-will; recent pricing actions.
- Churn and win-back history.
Working capital and cash timing
- TTM monthly AR/Inventory/AP; build a peg on the average.
- Discount aged AR, mark down dead stock, normalize stretched AP.
- LOI language for definition, peg method, collar, and true-up.
Structure alignment
- Seller note terms pre-cleared with your lender.
- Named-account earnout or small holdback where transfer risk is real.
- Transition support in writing: hours, deliverables, and artifacts.
Turning assumptions into terms (without blowing up goodwill)
When facts move the target, keep the conversation simple and cooperative.
- Show your work. Side-by-side schedules: seller vs. validated EBITDA; trailing peg chart; top-10 revenue table.
- Offer calibrated options. “We can reduce price by $X, or keep the headline and bridge $X with a seller note and a small earnout tied to gross profit from Customers A–C.”
- Solve bounded risks with bounded tools. Escrow for a tax exposure; earnout for retention; note for alignment. Avoid blunt, across-the-board cuts.
Sample LOI language you can use
Adjusted EBITDA basis
“Purchase price is based on normalized, QoE-validated Adjusted EBITDA, reflecting market-rate replacement for seller/related-party roles, exclusion of non-recurring items not supported by documentation, and normalization of discretionary spend required to sustain revenue.”
Working capital
“Working capital = AR + Inventory – AP (per historical policy), peg equals TTM average with a ±$[collar] and 60-day post-close true-up. Deferred revenue excluded from the peg; cost-to-fulfill handled as a separate closing adjustment if material.”
Risk sharing
“Consideration may include a seller note and/or a named-account earnout tied to gross profit retention for Customers [A–C] over [12–18] months.”
Transition
“Seller to provide up to [N] hours/week for [90–180] days post-close for customer/vendor introductions, SOP and pricing handoff, and staff training.”
Closing thought
Deals rarely fail because buyers asked one too many questions. They fail because buyers believed one too many assumptions. Replace each of the seven above with a document, a schedule, or a simple structure that shares the risk. You’ll pay a fair price, protect coverage, and step into an operation you can actually run—which is the only assumption that should be expensive if it’s wrong.
Contact us today or book a free consultation and learn how we can be a trusted partner on your next deal!
