Buying a friend's company meant the numbers got less scrutiny, not more

The situation

The plan, when Dawit first described it, sounded almost simple. He owned a chain of clinics he had built over years, was looking to diversify into a second industry, and had known Zoran for over two decades, since before either of them owned a business. Zoran's construction company had done well for years and Zoran was ready to step back. Dawit would buy the company, Zoran would stay on briefly to help with the transition, and the two of them would shake hands on a deal built on trust that had outlasted most business relationships either had ever had.

Ivan, a business partner of Dawit's, was brought in as a co-investor, contributing capital alongside Dawit toward a transaction sized somewhere between fifty and eighty million dollars once the construction company's contracts, equipment, and workforce were valued together. It was Dawit's first acquisition of this scale, and the friendship with Zoran was, in his mind, the reason the deal felt safe rather than a reason to look more closely.

The original structure both sides discussed was a share purchase, Dawit and Ivan buying the shares of Zoran's corporation outright, which is often the simpler route when a seller wants a clean exit and a buyer wants continuity of existing contracts and licenses. Zoran's own accountant had prepared financial statements for the business, and early conversations treated those numbers as settled, something to confirm rather than to interrogate.

That assumption held until our office requested the underlying draft financials rather than the summary figures Zoran's side had circulated, as a standard step before any purchase agreement was finalized. What came back changed the shape of the deal before a single clause of the agreement was drafted.

Ivan had been more cautious than Dawit from the start, having sat through diligence on other deals before, and had quietly pushed for the underlying financials to be requested even as Dawit waved off the idea as unnecessary given how well he knew Zoran. That small disagreement between the two co-investors turned out to matter more than either of them expected once the draft numbers actually arrived.

Neither Dawit nor Ivan had any reason to doubt Zoran's honesty. Nothing about the friendship, or about how Zoran had described the business over the years, suggested he was concealing anything deliberately. The company had real contracts, real equipment, and a workforce that had stayed with Zoran through slower years, and the story Dawit had been telling himself about the acquisition was a straightforward one: buy a solid business from someone he trusted, keep it running, and grow it the way he had grown his clinics. That story simply had not been tested against the underlying paperwork yet.

The complication

The draft financial statements carried a note from the company's auditor expressing substantial doubt about the business's ability to continue as a going concern. That is a specific, formal warning, not a general comment about a tough year, and it meant the auditor had identified real questions about whether Zoran's company could keep operating and paying its obligations without a significant change in circumstances.

Behind that note sat a set of practical problems: the construction company was carrying more debt than the summary figures had suggested, several large contracts had run over budget in ways not yet reflected in cash flow, and at least one supplier relationship had deteriorated to the point of threatened legal action over unpaid invoices. None of this had been hidden deliberately. Zoran had known the business was under strain but had described it to Dawit in the informal, optimistic terms one friend uses with another, not the terms an accountant would use in a formal disclosure.

The complication was structural as much as financial. In a share purchase, the buyer acquires the corporation itself, with all of its existing liabilities, known and unknown, attached. If the construction company's financial distress led to supplier claims, employee obligations, or tax liabilities surfacing after closing, Dawit and Ivan would inherit all of it simply by owning the shares that had always carried those obligations. A company already showing going-concern doubt is exactly the kind of target where that risk is highest, since financial strain tends to generate exactly the sort of contingent claims that only become visible after a buyer has already taken ownership.

The friendship made this harder to raise, not easier. Dawit was reluctant to treat Zoran, a person he trusted completely, the way he would treat a stranger selling a distressed business. But the going-concern note did not care about the friendship, and neither would a supplier's lawsuit filed six months after closing.

There was a further wrinkle in the timing. Zoran had already told several long-time employees, informally, that the business was being sold and that little would change day to day. Slowing the deal down to restructure it risked those employees hearing, secondhand, that something had gone wrong, which could have prompted departures before Dawit and Ivan ever took ownership of a company that depended heavily on its skilled workforce to deliver on existing contracts.

A going-concern note is also not the same thing as insolvency, and treating it as an automatic deal-killer would have overcorrected in the other direction. It is an auditor's statement that, absent some change, there is substantial doubt the business can meet its obligations over the coming year — a warning sign that demands a structural response, not necessarily a reason to walk away from a business with real contracts and a real workforce still in place.

What we did

1. Requested the full draft financials and auditor's notes directly, rather than relying on the summary figures Zoran's accountant had circulated earlier, because a going-concern warning of this kind is exactly the sort of detail that gets softened or omitted when numbers are shared informally between parties who trust each other, and the summary figures Zoran's accountant had circulated made no mention of the auditor's note at all.
2. Explained the practical difference between a share purchase and an asset purchase to Dawit and Ivan in plain terms, walking through how a share purchase would make them responsible for every existing liability of Zoran's corporation, known or not, while an asset purchase would let them select which assets and contracts to acquire while leaving most existing liabilities behind with the corporate seller.
3. Identified which contracts, licenses, and equipment were essential to keep the construction business running under new ownership, and confirmed which of the company's existing government and industry licenses could transfer to an asset buyer versus which would need to be reapplied for, since that determines how smoothly an asset purchase can actually operate day one. That review produced a working list that shaped the asset purchase agreement's schedules, so nothing essential to the contracts already underway was accidentally left behind with Zoran's corporation.
4. Raised the going-concern finding directly with Zoran, treating it as a business fact requiring a structural response rather than an accusation, which allowed the conversation to stay collaborative even as the deal itself became more protective of Dawit and Ivan's position, and which mattered because Zoran needed to hear the change in structure from Dawit directly rather than through a lawyer's letter that could have read as an accusation of bad faith.
5. Renegotiated the transaction as an asset purchase, with Dawit and Ivan's company acquiring the operating assets, key contracts, and equipment for a price reflecting the business's actual condition, while Zoran's existing corporation retained responsibility for its outstanding debts and the supplier dispute. Restructuring the deal this way, rather than lowering the share price to account for the risk, meant Dawit and Ivan never had to rely on Zoran's corporation actually paying down what it owed, since the liabilities stayed outside the business they were taking on.
6. Built in specific protections for employee continuity, since an asset purchase does not automatically carry over a workforce the way a share purchase would, arranging for key employees to be offered new employment directly with the acquiring company on comparable terms, with service recognized for vacation and other entitlements, to preserve the workforce the business depended on without anyone losing accrued benefits in the transition.
7. Coordinated a holdback tied to the supplier dispute, so that if the pending claim against Zoran's corporation somehow reached toward the assets being purchased, funds would be available to resolve it without disrupting the new company's operations. This was the detail that let Dawit finally exhale, since it meant even an unexpected escalation of the supplier claim after closing would not reach into the operating business he and Ivan were building.
8. Closed the transaction with Zoran's corporation retaining its liabilities and winding down separately from the operating business that continued under Dawit and Ivan's ownership, giving both sides a clean line between what had been sold and what had not, and giving Zoran's corporation the room it needed to wind down its remaining obligations on its own timeline, separate from the business now operating under new ownership.

The outcome

The construction company's operations transferred to Dawit and Ivan's new entity largely intact: the equipment, the key contracts, the workforce, and the licenses needed to keep working. What did not transfer was the debt load and the supplier dispute that had prompted the going-concern warning in the first place, both of which stayed with Zoran's original corporation to be resolved or wound down separately from the business now operating under new ownership.

The purchase price reflected the business's real condition rather than the healthier picture the informal early conversations had painted, which meant Zoran received less at closing than the original, more casual discussions had suggested. That was a genuine concession on his side, made easier by the fact that the alternative, a distressed sale with no buyer at all, was the real comparison once the going-concern note was on the table.

Dawit and Ivan's construction business has operated since closing without inheriting the supplier dispute or the debt that triggered the original warning. The friendship between Dawit and Zoran survived the deal, in part because the structural conversation happened directly and early, rather than after a supplier's claim or a tax liability had already landed on Dawit's desk asking why nobody had mentioned it.

Ivan's early instinct to slow down and look at the real numbers, before Dawit had come around to the same view, ended up shaping the entire outcome. Dawit has since said openly that the deal would likely have gone through as a share purchase if the request for full financials had not been made, and that he did not fully grasp what he would have been agreeing to inherit until the going-concern note was explained to him directly.

The clinics Dawit already owned gave him no real preparation for evaluating a distressed construction company; the two businesses have almost nothing in common beyond both requiring a licence to operate. That gap is common in first acquisitions outside a buyer's own industry, and it is exactly why the underlying financials, not the summary numbers a seller's own accountant prepares, need to be the starting point rather than a formality to get through on the way to signing.

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