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June 4, 2025
Mergers and acquisitions (M&A) can dramatically alter a company’s trajectory—unlocking new markets, technologies, or customer bases. Yet, many deals stumble or fail due to murky financials, hidden liabilities, or incomplete documentation. Whether you’re aiming to sell your business or acquire another, thorough M&A preparation ensures a smoother process and optimizes your valuation or integration outcomes.
In this post, we’ll outline how to prepare your financial statements, address compliance matters, and execute proper due diligence so that you enter M&A discussions from a position of strength.
Selling vs. Acquiring
Common Pitfalls Deals stall when sellers can’t produce cohesive financial documents, or buyers discover late-stage red flags. Proper readiness mitigates these stumbling blocks.
(Source: SEC.gov)
GAAP or IFRS Compliance Investors and buyers typically require standardized statements. Engage auditors or accountants to ensure your statements conform to GAAP (in the U.S.) or IFRS (internationally), giving buyers or sellers confidence in reported numbers.
Historical Data Integrity Most transactions involve a 3-5 year lookback. Clean up inconsistencies, address prior period adjustments, and confirm AR/AP aging schedules. If you’re the buyer, request multi-year audited or reviewed statements from the target.
Adjusting for One-Time Expenses Non-recurring items—such as lawsuit settlements or exceptional R&D costs—can distort EBITDA or net profit. Label these “one-time” clearly, so prospective parties see your core operating performance accurately.
Revenue Recognition Policies For subscription models, milestone contracts, or multi-year deals, verify that revenue recognition aligns with recognized accounting standards. This ensures the buyer or seller sees stable and reliable income patterns.
Profit Margin Analysis Break down margins by product line or service segment. A prospective buyer might only want to acquire certain lines if others drag overall profitability. As a seller, emphasize your strongest lines’ growth and margin resilience.
Overhead and Allocation Reveal how shared resources (e.g., marketing, HQ rent) are allocated among divisions. Buyers may restructure overhead post-acquisition, so clarity helps them plan synergy and cost-saving opportunities.
Tax Liabilities Unresolved tax obligations can derail deals. Confirm local, state, and federal filings are current. If you’re the buyer, request tax clearance certificates or perform thorough tax due diligence on the target.
Legal and Contract Reviews Examine key customer and vendor contracts for change-of-control clauses that might be triggered by an acquisition. Identify any ongoing litigation or regulatory inquiries that could hamper valuation or tie up resources.
Employee-Related Obligations Contracts with employees, especially executives or unionized staff, may contain severance or retention bonuses in an M&A scenario. Both sides should account for these potential outflows.
Purpose of QoE A QoE report verifies net income from continuing operations, stripping out non-operational items. It typically covers revenue validation, cost normalization, and working capital requirements.
Seller’s Role A credible, third-party QoE study builds buyer trust and can expedite negotiations. Sellers highlight stable earnings while acknowledging any transitional costs.
Buyer’s Perspective Buyers commission their own QoE to validate the target’s financial claims or uncover anomalies. Discrepancies can drive price adjustments or renegotiations.
Tidy AR/AP Slow-moving receivables or old payables signals inefficient processes or potential uncollectibles. Clean them up or adjust them to reflect realistic values. Buyers often set working capital targets that must be met at closing.
Inventory Rationalization If your business holds inventory, ensure accurate counts and valuations. Excess, obsolete, or mislabeled stock can reduce perceived value. JIT or well-managed inventory is more attractive to buyers.
(Source: SBA.gov)
Cash Reserves Sometimes deals specify a certain net cash position at closing. Plan liquidity to align with these covenants, or if you’re acquiring, evaluate the target’s cash burn rate for synergy or post-deal integration strategies.
Three-Statement Models Produce integrated income statement, balance sheet, and cash flow forecasts, typically 3–5 years out. Show best-, base-, and worst-case scenarios. This demonstrates strategic foresight.
Growth Assumptions Back up growth rates with historical trends, sales pipeline details, or market research. Overly aggressive projections invite skepticism, while conservative ones might leave money on the table if you’re selling.
Sensitivity Analysis Highlight how changes in key drivers—like sales volume, cost of raw materials, or labor rates—could affect future performance. Buyers appreciate transparent risk disclosures.
Workforce Data Compile clear records of headcount, compensation structures, benefits liabilities, and training costs. M&A integration often involves workforce restructuring; transparency eases that process.
Key Person Dependencies If the business relies heavily on a few individuals’ relationships or expertise, that’s a risk factor. Implement succession planning or non-compete agreements to reassure buyers or preserve post-acquisition value.
Cultural Alignment While intangible, cultural misalignment can sabotage synergy. Evaluate how the target’s or buyer’s values, management style, and HR policies mesh with your own.
Internal Task Force Designate a cross-functional group—finance, legal, HR, operations—to gather due diligence materials, facilitate audits, and handle integration or carve-outs. They act as the central command for all M&A activities.
External Advisors Legal counsel, accountants, and M&A consultants like Escalon Services can manage complexities—from finalizing the purchase agreement to orchestrating post-merger integration. Their expertise often pays off by avoiding pitfalls that sabotage deals.
Clear Roles and Timelines Assign responsibilities—like who answers vendor queries, who compiles tax info, and who coordinates with potential buyers or targets. Keep a master timeline for each stage—letter of intent (LOI), due diligence, final negotiations, etc.
Post-Merger Integration (PMI) After a successful transaction, merging finance systems, processes, and teams is critical. Outline a 30-, 60-, and 90-day plan for adopting consistent policies, consolidating vendors, or unifying tech stacks.
(Source: Harvard Business Review)
Change Management Employees need clarity on roles, job security, and new cultural norms. Frequent updates, Q&A sessions, and leadership visibility help quell rumors or anxiety.
Measuring Success Set KPIs—like synergy savings, revenue growth, or margin improvement—linked to the M&A rationale. Periodically evaluate if the deal is meeting strategic and financial goals, adjusting integration efforts as needed.
Whether you’re buying or selling, thorough financial preparation, transparent reporting, and proactive risk identification are key pillars of a successful M&A deal. By refining your statements, validating performance through QoE studies, and assembling a strong internal and external advisory team, you’ll minimize surprises and negotiate from a position of clarity. This preparation extends beyond the closing date—smooth integrations demand equally rigorous post-deal planning to capture synergy and maintain momentum.
How Escalon Can Help Escalon Services provides end-to-end M&A support, from pre-transaction readiness to post-merger integration. Their finance experts can streamline due diligence processes, ensure compliance, and guide synergy plans—helping you realize maximum value, whether you’re on the buy side or sell side.
Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.
Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.
Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.
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