Defending an Earnings Number Built on Two Related Companies

The situation

The number on the table was roughly $5.6 million, before adjustments. That was the enterprise value a national veterinary distribution group had verbally offered for the Gravenhurst company Megan and Jordan had spent eleven years building. The offer was pegged to a multiple of the company's yearly earnings, which came in at just under $900,000. Inside that figure sat a smaller, more fragile number: about $140,000 a year tied to a fee the company charged a second company the pair also owned. Once the buyer's accountants found it, the whole deal slowed down.

Megan had started out as a delivery courier, driving parcels for a regional carrier before she saved enough to buy a used cargo van and begin hauling veterinary pharmaceuticals to small-animal clinics around the region. Jordan, a licensed veterinary technician, joined a few years later, bringing clinical relationships and product knowledge Megan did not have. Between them they turned a one-van operation into a distributor supplying dozens of clinics, with a dozen employees and the kind of steady, unglamorous growth that eventually attracts buyers.

Alongside the company, the pair also owned a small courier company that handled deliveries for several clients, including the company itself. The company paid the courier company for deliveries, and the courier company paid the company a management fee for administrative support. It was a tidy arrangement between two businesses under common ownership, and for years nobody outside the two companies looked closely at it. That changed once Megan and Jordan decided they were ready to sell, engaged a business broker named Analyn and within ten weeks found a buyer willing to offer a price inside the $3 million to $8 million range they had hoped for.

The letter of intent came together quickly and the deal moved into due diligence, where the buyer's accounting team began a formal earnings review. Within two weeks they had isolated the management fee, asked for supporting documentation that did not exist in the form they wanted, and told the sellers' broker that the entire fee might need to be treated as unreliable and stripped from the earnings the price was based on. For two owners who had never gone through a sale before, that single finding suddenly put a large piece of their payout in doubt, and neither of them fully understood why a fee they had paid themselves for years was suddenly being treated as a problem.

The timing made it worse. Diligence dragged into its third month, and the company's trading softened along the way: a regional clinic chain that had accounted for close to a sixth of monthly volume moved to a competing distributor mid-review, and two smaller accounts delayed their reorders once word of a possible sale began circulating locally. By the time the dispute came to a head, monthly revenue was running behind the year before, giving the buyer's accountants a second reason to press for a lower number.

What the documents showed

A buyer pricing a private company is not just looking at last year's revenue. They are pricing a multiple of adjusted earnings, a figure meant to represent what the business will reliably generate once it belongs to someone else. Related-party transactions get particular scrutiny in that exercise, because a fee paid between two companies under common ownership is not automatically an arm's-length price, and it will not necessarily continue after closing on the same terms, if it continues at all. A buyer has every reason to ask whether that revenue reflects the real business or an arrangement that exists only because the same two people control both sides of it.

When our team pulled the history, the origin of the arrangement was clear enough. About four years before the sale process began, Megan had read an online article about maximizing a company's earnings ahead of a future sale, and one of its suggestions was to formalize management fees between related entities to capture value that might otherwise go unrecognized. Megan and Jordan followed that suggestion without professional guidance, setting a fee amount that felt reasonable to them but was never benchmarked against what an unrelated logistics company would actually charge for equivalent services, and was never documented in a written agreement until much later.

That absence of contemporaneous support was the real problem. The buyer's accountants were not necessarily convinced the entire $140,000 was fabricated; they simply had no way to tell how much of it reflected real, ongoing cost recovery and how much was inflation dressed up as an intercompany charge. Faced with that uncertainty, their first position was the simplest one available to them: treat the whole amount as unreliable and remove it from the earnings the purchase price was based on. At the multiple the parties had agreed to, that single adjustment would have reduced the purchase price by roughly $850,000, a meaningful share of the deal.

The documents also showed something in Megan and Jordan's favour, once someone took the time to organize them. The courier company did real work for real third-party clients beyond the company, it maintained its own vehicles and staff, and portions of the fee tracked reasonably closely to market rates for comparable delivery and logistics services in the region. The story was not that the earnings were invented. It was that nobody had ever written the story down in a form a buyer's accountant could verify.

What we did

1. Reviewed the intercompany history in full. We pulled four years of invoices, bank records, and correspondence between the two companies, and sat down with Megan and Jordan for a long session to understand exactly when the fee structure began, why the amount had been set where it was, and what the online guidance that prompted it actually said, so we knew precisely what we were defending before the buyer's team pressed further.
2. Rebuilt a normalized earnings schedule. We brought in accountants to reconstruct the company's adjusted earnings with every related-party item identified and explained on its own line, showing the reasoning behind each figure, rather than leaving the buyer's team to estimate or assume the worst case, with each disputed line traced back to an underlying invoice or bank record the buyer's own accountants could check.
3. Benchmarked the management fee against market rates. We gathered comparable pricing for delivery and logistics services in the region, spoke with an industry contact about typical administrative fee structures, and used that to show a real portion of the fee reflected genuine cost recovery, not simply revenue shifted between two companies to inflate the numbers on paper, cross-checked against quotes from two other regional providers rather than published averages alone.
4. Disclosed proactively rather than waiting to be pressed. Instead of responding defensively to each new question as it came, we brought the full picture to the buyer's counsel and accountants ourselves, with supporting detail attached and a plain explanation of the history, which changed the tone of the conversation from suspicion toward a technical disagreement over amounts, supported by a short written summary that walked the buyer's team through the full history before their next round of questions arrived.
5. Negotiated a split adjustment to the earnings base. Rather than accepting an all-or-nothing removal of the fee, we argued for keeping the portion that matched market rates inside adjusted earnings, with only the amount above market rate excluded, and supported that position line by line with the benchmarking data we had assembled, proposing a specific dollar threshold above which the fee could not be defended rather than leaving the buyer's team to draw their own line unanchored.
6. Put a written service agreement in place going forward. To answer the buyer's concern about continuity after closing, we papered the courier arrangement at a documented market rate with clear terms, giving the buyer confidence the relationship would hold up on its own after the sale rather than depend on informal understanding between two owners who would no longer both be involved.
7. Reworked the price adjustment mechanics. In place of a flat reduction to the purchase price, we negotiated a smaller upfront adjustment paired with a short earn-out tied to growth in the company's non-related revenue over the following year, so Megan and Jordan were not penalized twice over for the same disputed dollars, with the earn-out structured so a strong year let them recover close to what they had originally expected.
8. Closed with clear representations on the related-party dealings. The final purchase agreement addressed the intercompany history explicitly and set out how the fee arrangement would be treated going forward, so nothing about it was left as an open question the buyer could revisit after the money had already changed hands, including a specific representation that the courier agreement now in place reflected market terms going forward.

The outcome

The sale closed at a price close to the original figure the parties had discussed, with an adjustment considerably smaller than the buyer's initial position. Instead of losing the full $850,000 the buyer's accountants had first proposed, Megan and Jordan absorbed a reduction closer to a third of that, reflecting the portion of the management fee that could not be fully supported at market rates, while the benchmarked, defensible portion stayed inside the earnings base the price was calculated on.

It was not a costless outcome, and it should not be read as one. Megan and Jordan gave up real money they had hoped to keep, roughly $280,000 by the time the adjustment was finalized, and the process took several weeks longer than either of them expected, with genuine effort spent rebuilding records that should have existed from the start. The lesson from the online advice they had followed years earlier was expensive, even once the final number came in far below the buyer's opening position. The softer trading that shadowed the back half of due diligence did not help their leverage at the table either, and it is fair to say the buyer's team used it, quietly, as one more reason not to move off their position quickly.

What mattered more was that the deal held together at all. A buyer who concludes a seller's earnings cannot be trusted will often walk away rather than keep negotiating, and the early signals from the buyer's accounting team suggested exactly that risk was live. By organizing the history, benchmarking the fee against real market data, and disclosing before being asked twice, the sellers turned a credibility problem into an ordinary pricing discussion. The transaction closed on terms that reflected the genuine strength of the underlying business, and both owners walked away with a clear account of what the earnings actually represented, which is not something they had before the review began.

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