A second sale nearly repeated the first company's blind spot

The situation

Ratana and Deepa had built two companies together. The first, a small equipment rental outfit, they sold a decade earlier without much drama, and the experience left them both confident that selling a business was mostly a matter of finding the right buyer and signing where told. Their second company, an Ottawa distributor of parts to commercial kitchens, had grown steadily for nine years on the back of long-term supply contracts and a reputation for standing behind what they shipped.

Neither of them drew much from the business in its early years. Ratana kept driving a school bus on weekday mornings and afternoons well into the company's fourth year, partly out of habit and partly because the business could not yet support two full salaries. Deepa did the same with long-haul trucking, taking runs between contracts to keep steady income coming in while the company reinvested almost everything it earned. By the time a mid-sized buyer approached them with an offer in the mid single-digit millions, both of them were ready to be done, and the number on the table looked, at first glance, fair.

Their partnership had always worked because they split responsibilities cleanly. Deepa ran operations and supplier relationships. Ratana handled the books, customer contracts, and anything involving warranty claims, since kitchen equipment parts fail in ways that generate disputes, credits, and the occasional replacement shipment written off as a cost of doing business.

When the buyer's due diligence team asked for five years of warranty claims data, Ratana pulled the file her accountant, Aditya, had always used to estimate the year-end reserve, the number set aside on the books to cover claims not yet resolved. It had never been questioned before. This time, someone on the buyer's side actually read it line by line.

The buyer, a larger national kitchen equipment distributor looking to add Ottawa coverage, had done several acquisitions before and staffed its due diligence team accordingly. Where a smaller, less experienced buyer might have accepted the reserve figure at face value, this team cross-checked it against three years of actual claims paid, a step that had never happened during the sale of Ratana and Deepa's first company. The mismatch they found was not subtle once someone looked for it, and it turned what both founders expected to be a routine six-week closing into a negotiation neither of them had planned for.

The problem

The buyer's financial due diligence team flagged a pattern Ratana had never noticed: the reserve Aditya carried on the balance sheet had been calculated the same simplified way for years, using a flat percentage of revenue rather than the company's actual claims experience. Actual claims paid out had been running well above that flat estimate for the last three years, meaning the true exposure the company was carrying was materially larger than what appeared on its books. In plain terms, there was a liability the company owed but had not properly counted, an off-balance-sheet obligation in substance even though nobody had hidden anything on purpose.

The buyer's lawyers raised it as a warranty breach risk under the representations both founders were being asked to sign, statements confirming the financial statements fairly reflected the company's liabilities. If the reserve had been understated for years, that representation could not honestly be made as drafted, and the buyer's team said so directly.

Ratana's first instinct was to ask Aditya, who had prepared the numbers since the company's early days, to explain the gap. The answer was not reassuring: Aditya had used the same flat-percentage method since the first company, had never updated it as the second company's claims profile changed, and had not flagged the growing divergence between the estimate and the real payout history because nobody had asked. It was not fraud. It was an advisor who had missed something that should have been caught years earlier, and now it was sitting in the middle of a live negotiation with a deadline attached.

The buyer's opening position was blunt: either the purchase price came down by the full estimated shortfall, or the deal would need a much larger holdback and an indemnity specific to warranty claims, effectively making Ratana and Deepa personally responsible for years of claims their own advisor had underestimated.

Ratana's reaction, understandably, moved between anger at Aditya and worry that the buyer would simply walk away rather than work through it. Deepa, who had trusted Ratana to manage this side of the business for nine years, did not blame her outright, but the discovery strained a partnership that had otherwise run smoothly for two decades. Both founders needed a clear-eyed answer to a practical question before anything else could move forward: was the buyer's estimated shortfall accurate, or inflated, and what would actually happen to the deal if the two sides could not agree on a number.

What we did

1. Pulled the full claims history ourselves rather than relying on Aditya's summary, going back five years to the underlying claim files, credit notes, and replacement shipments, because the buyer's number needed to be checked against source documents before we could agree or dispute it, and a second-hand summary would not hold up in negotiation. We also flagged which claims had closed by credit note versus outright replacement, since the two categories carried different cost profiles the buyer's blended estimate had ignored.
2. Built an independent reserve calculation using the company's actual loss experience by product line rather than the flat percentage Aditya had always applied, which showed the shortfall was real but somewhat smaller than the buyer's initial estimate, giving us a defensible counter-number instead of simply disputing theirs on principle without a substitute figure to offer. That line-by-line breakdown also let us show which product categories were driving most of the gap.
3. Separated the disclosure problem from the deal-breaking problem, explaining to Ratana and Deepa that an honest mistake in a long-standing accounting method is a valuation issue to negotiate, not evidence of concealment that would void the deal outright, which changed the tone of every conversation that followed and let both founders stop treating the discovery as a crisis rather than a solvable negotiation point.
4. Proposed a split remedy instead of accepting either of the buyer's two opening options outright: a modest price adjustment reflecting the corrected reserve, paired with a time-limited holdback rather than an open-ended personal indemnity, so the founders' exposure had a defined ceiling and a defined end date instead of following them indefinitely after closing, which is what the buyer's original terms would have done.
5. Negotiated the holdback mechanics line by line, including how claims would be verified against the historical pattern, who adjudicated disputes about whether a given claim was ordinary or a new issue, and exactly when unused holdback funds would be released, since a vaguely worded holdback clause tends to create its own dispute months down the line, long after the deal itself has closed.
6. Advised the founders on their relationship with Aditya going forward, recommending they have the reserve methodology reviewed by an independent professional before any future transaction, since the same gap would resurface in a later sale if the underlying calculation method itself never changed, no matter how carefully the current sale was resolved. Ratana agreed to make this a standing practice rather than a one-time fix.
7. Coordinated final representations and warranties language with the buyer's counsel so the corrected reserve figure, not the original flat estimate, became the baseline the closing representations were measured against, protecting both founders from a future claim built on the old, understated number rather than the figure both sides had actually agreed reflected reality. This step mattered because a poorly cross-referenced representation could have let the buyer reopen the same dispute after closing.
8. Walked Deepa through the numbers independently of Ratana, since Deepa had relied entirely on Ratana's handling of this file for years and needed her own understanding of the exposure and the proposed compromise before either founder signed anything binding both of them personally, rather than deferring to her partner's read of a deal that carried personal financial consequences for her too.

The outcome

The deal closed roughly six weeks later than originally scheduled, at a purchase price reduced by an amount tied directly to the corrected reserve calculation, with a portion of the sale proceeds held back for eighteen months to cover any warranty claims that came in above the historical pattern. Neither founder got the number they had shaken hands on when the offer first came in.

The compromise was not a win in the sense either founder had hoped for walking into due diligence, and we told them plainly that a price reduction plus a holdback was a real concession, not a formality. What it avoided was worse: an open-ended personal indemnity with no cap and no end date, which is what the buyer's first position would have meant for both of them individually, well past the point of the sale closing.

Eighteen months later, the holdback period closed with a modest portion retained for claims that came in above the adjusted estimate, and the balance released to Ratana and Deepa as agreed. Both founders have since had Aditya's reserve methodology reviewed independently before taking on any new advisory work from him, a step neither had thought necessary before this sale forced the question.

The strain the discovery put on Ratana and Deepa's partnership eased once the numbers were settled and the deal closed on agreed terms, though both founders have said since that the six weeks in between were the hardest stretch of either sale they had gone through together. Ratana in particular has been direct about the lesson: a trusted advisor's long track record is not the same thing as a correct method, and the two decades of confidence she had in Aditya's numbers turned out to rest on an assumption nobody had actually tested. Deepa, for her part, now asks for a second opinion on any significant financial figure before it goes into a deal document, a habit she has said she wishes had started years earlier.

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