Rebuilding a Set of Books Before Three Investors Would Sign

The situation

Sylvain called on a Tuesday afternoon with a letter of intent supposedly going out that Friday and a deal that, in his words, 'does not currently make sense on paper.' He led a private equity-backed buyer assembling a club of co-investors to acquire a mechanical contracting business in Barrie, a company built over two decades by Rejean and Arman, who had started their careers as a plumber and an electrician respectively before joining forces to bid on larger commercial and institutional jobs neither of them could have won alone.

The target company had grown into a workforce of roughly forty tradespeople and a revenue base that supported a transaction value somewhere in the fifteen to thirty million dollar range, the kind of deal too large for Sylvain's fund to write alone and too attractive to pass up. He had brought in two co-investors, each contributing a meaningful slice of the equity, to form what is commonly called a club deal: a small group of investors buying together, sharing governance and eventually sharing the exit, rather than one buyer taking the whole position. Each co-investor brought more than capital: one had run mechanical contracting roll-ups before and understood the trade, while the other had relationships with the larger institutional clients the buyer group hoped to win once the acquisition closed, and Sylvain wanted both of them inside the ownership group rather than negotiating with them as outside lenders.

Three weeks into diligence, the working financial model that Sylvain's team had built from the target's internal reports stopped reconciling. Revenue recognized on large multi-year contracts did not match the cash actually collected, work-in-progress balances looked inflated against the underlying project files, and nobody on either side could say with confidence what the business had actually earned over the prior two years. Meanwhile, the co-investors, who had been comfortable enough to commit verbally, were now asking pointed questions about who would control major decisions after closing and how each of them could eventually sell their stake, questions nobody had settled while the numbers still looked clean.

The two problems fed each other. Every governance conversation stalled because nobody trusted the earnings figure it was supposed to be based on, and every accounting question got harder to resolve because the co-investors were losing confidence in the deal generally. Sylvain needed both fixed inside a matter of days, not weeks, or the syndicate he had spent months assembling was going to come apart before a single document was signed.

The complication

The accounting problem, once someone actually sat down with the underlying project files rather than the summary reports, turned out to be a percentage-of-completion issue. The target recognized revenue on long-term contracts based on estimated project completion, a standard method for a contracting business, but the estimates behind several of the largest jobs had not been updated in over a year. Two contracts thought to be seventy percent complete were closer to fifty, and a third, thought finished, still had a meaningful holdback and outstanding deficiency work attached to it. None of this was necessarily misconduct. It looked more like a business that had grown faster than its internal reporting had kept pace with, run by two tradespeople who were excellent at the work itself and had never needed sophisticated project accounting until a buyer showed up asking for it.

Once the estimates were corrected, adjusted earnings for the trailing two years came in noticeably below the figure the original letter of intent discussions had assumed, which meant the valuation conversation had to be reopened at the worst possible moment, with three co-investors already nervous about the deal generally.

The governance question was separate but no less urgent. A club deal only works if the co-investors agree in advance on decisions that will inevitably come up after closing: who sits on the board, what requires unanimous consent versus a majority, how disputes between investors get resolved, and critically, how and when each investor can exit their position, whether through a sale to the others, a co-sale right alongside a future buyer, or a forced sale if the group cannot agree on the company's direction. None of that had been documented. The three investors had discussed the deal in principle for months but had never put their own arrangement in writing, assuming there would be time later, and none of the three had negotiated a co-ownership agreement of this kind before, since each was used to being the sole decision-maker in his own business rather than one voice among three.

There was no time later. With the accounting picture shifting and the letter of intent deadline days away, one of the two smaller co-investors began signalling that he might pull out entirely rather than commit capital to a deal whose numbers kept moving and whose exit terms were undefined. Losing him would have reduced the buying group's total capital below what was needed to complete the acquisition on the terms already discussed with the seller, and finding a replacement investor on a compressed timeline was not a realistic option.

What we did

1. Brought in forensic accounting support immediately. Given the timeline, we retained accountants who specialize in contractor percentage-of-completion accounting to work through the underlying project files directly, rather than relying on the target's summary schedules, so the buyer group had an independent, defensible earnings figure within days rather than weeks, working evenings and a weekend to keep pace with the Friday letter-of-intent deadline the group was still trying to hold.
2. Reconstructed a corrected earnings base. Once the accountants identified which contracts had stale completion estimates, we worked with them to rebuild a revised two-year earnings history, project by project, and prepared a clear written explanation the co-investors could actually follow, since restoring their confidence mattered as much as the number itself, and a co-investor who does not trust the earnings figure will not trust the governance terms built on top of it either.
3. Reopened the valuation conversation with the seller promptly. Rather than letting the letter of intent go out on numbers we knew to be wrong, we went back to Rejean and Arman's advisors with the corrected figures and a straightforward explanation, avoiding a larger dispute later in diligence when trust between the parties would be harder to rebuild than it was in that first uncomfortable conversation.
4. Drafted a club deal agreement among the three co-investors. We put governance terms in writing for the first time: board composition, a defined list of major decisions requiring more than a simple majority, and a process for resolving disagreements among the investor group, so the syndicate had rules before it needed them rather than after a dispute had already started.
5. Negotiated exit rights each investor could live with. We built in a right of first refusal among the co-investors before any outside sale, a tag-along right so smaller investors could join a sale the larger investor negotiated, and a narrow buy-sell mechanism for a true deadlock, addressing the hesitant investor's specific concern about being stuck without an exit if the other two ever wanted to sell and he did not.
6. Coordinated the two workstreams so neither one stalled the other. We ran the accounting reconciliation and the club deal negotiation in parallel rather than sequentially, holding daily check-ins between the accountants and the co-investors' counsel so a delay on one side did not quietly become a delay on both, which is the usual way a compressed timeline like this one actually falls apart.
7. Repriced the transaction on the corrected numbers. With a defensible earnings figure in hand, we negotiated an adjusted purchase price with the seller that reflected the real, corrected performance of the business rather than the inflated estimate that had started the process, protecting the buyer group from overpaying based on numbers nobody could stand behind, and giving the co-investors a price they had all actually reviewed rather than one carried forward out of momentum.
8. Delivered a signed letter of intent on the revised timeline. The document that went out was three days later than originally planned but reflected numbers the co-investors actually trusted and governance terms they had agreed to in writing, which meant it held rather than becoming the first document in a longer negotiation to unwind it once the pressure of the deadline had passed.

The outcome

The letter of intent went out with a short delay and a purchase price adjusted downward by an amount reflecting the corrected earnings, landing the final transaction value toward the lower end of the fifteen to thirty million dollar range the group had originally discussed. All three co-investors signed, including the one who had been closest to withdrawing, once the club deal agreement gave him a concrete answer on how he could eventually exit his position rather than a vague understanding among friends.

The correction was not free for the seller either. Rejean and Arman accepted a lower price than the number first discussed in principle, a direct consequence of accounting practices that had not kept pace with the business they had spent two decades building, though the corrected figure was one their own advisors ultimately agreed reflected the company's real performance rather than an aggressive discount imposed on them from outside. They kept the deal, and the buyer group kept a defensible number to build on going forward.

The acquisition closed roughly ten weeks after the corrected letter of intent, on schedule against the revised timeline the parties had agreed to once the numbers stabilized. The club deal agreement negotiated under real pressure in those final days became the standing governance document for the three co-investors, covering board seats, major decisions, and exit rights that none of them had thought to write down when the deal still looked simple. Sylvain later noted that the accounting crisis, disruptive as it was in the moment, had forced a governance conversation the group would otherwise have kept postponing until an actual dispute among the investors made it unavoidable, at a point when goodwill would have been harder to find. Looking back, he said the pressure of the compressed timeline had actually helped: with real money and a real deadline on the table, none of the three investors had the luxury of letting the governance conversation drag on the way it likely would have if it had stayed hypothetical.

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