Challenge: There was a significant change in the profit and loss (P&L) statement from the seller after TVG had already marketed an EBITDA number and found a Buyer based on the original inaccurate data.
Since, the seller was unaware of his own financial numbers and not familiar with how to read financial statements, he gave the documents to TVG stating that they were complete and final statements from their CPA. At that point, their tax returns were not yet filed for that year, so TVG used the P&L for the current year in the EBITDA calculations. The full EBITDA number was calculated using two years of prior tax returns and one year of the current P&L. The current P&L was weighted at 50% towards the marketed EBITDA number to most closely mimic trends in their business. However, the CPA was a year behind on entering expenses due to the seller/owner’s delay of delivering credit card statements. This produced a grossly overstated profit statement.
Approach: When the bookkeeping was complete, the final and correct P&L was delivered. TVG was able to explain to the buyer the reason for the changing numbers. It was agreed that the sale price would be adjusted accordingly. The same multiple that was applied on the incorrect EBITDA was applied to the new EBITDA, and the buyer was satisfied with the adjustments. With a proper explanation of the error, he proceeded in buying the business. TVG used a weighted average of three years of EBITDA so the change in the current year EBITDA was only weighted at 50%. Therefore, the impact on the new sale price was only 50% of the corrected EBITDA numbers. Whereas, had TVG used the current year P&L EBITDA 100%, the effect on the sale price would have been much more significant.
Result: Buyer was happy with the approach to the adjusted sale price and TVG was able to close the deal.