Three Guards Turned Managers Nearly Bought an Inflated Number

The situation

The seller's advisor opened the negotiation with a two-page earnings summary showing adjusted EBITDA of just over $2.4 million, built up from reported earnings through a list of addbacks: the owner's above-market salary, a company vehicle used partly for personal travel, a one-time insurance settlement from two years earlier folded in as if it recurred annually, and a consulting fee paid to a relative that the schedule described as discretionary. Applied to the multiple the parties had informally discussed, that adjusted figure implied a purchase price somewhere near the top of the $8 million to $15 million range the three buyers had been preparing for.

Valentina, Laszlo, and Gabor had each worked at the company for more than a decade, starting as frontline security guards on commercial and industrial contracts across the region before working their way into operations and account management roles. When the founding owner decided to retire, he offered the three of them first right to buy the business, a management buyout the trio had wanted for years and had spent months preparing to finance, arranging a mix of personal capital and a loan secured against the business's own contracts and receivables.

None of the three had ever bought a company before, and none had reason to distrust the owner they had worked for and respected for years. But the earnings schedule he presented was built by his own accountant, using his own judgment about which expenses were 'personal' and which revenue was 'recurring,' and every one of those judgment calls happened to land in a direction that made the business worth more. That is not unusual in a sale process; sellers are entitled to argue for the strongest honest picture of their business. The risk was not that the owner had done anything improper. It was that the buyers had no independent basis for accepting his numbers, and their financing, their price, and the multiple applied to that price all depended on a figure nobody on their side had verified.

The three came to Treadstone with a signed letter of intent already in hand, built around the seller's own adjusted number, and a closing timeline their lender wanted to move quickly. What made the situation urgent was not a legal defect. It was that every week that passed with the unverified number sitting inside the letter of intent made it harder, practically and psychologically, to challenge it later.

What made this urgent

A letter of intent is not binding on price in the way a final purchase agreement is, but it functions as an anchor. Once a number sits in a signed LOI, however non-binding, both sides start treating it as the starting point for everything that follows, and a buyer who wants to challenge it later has to explain why they are walking back something they already put their name to. The longer Valentina, Laszlo, and Gabor operated as if the $2.4 million adjusted figure were solid, the more that number would harden into the deal's baseline, regardless of whether it held up to scrutiny.

There was a financing dimension as well. Their lender's term sheet was built around a debt-service ratio calculated against the seller's adjusted EBITDA, not the company's raw reported earnings. If the real, defensible earnings figure came in materially lower, either the purchase price needed to come down to match it, or the buyers needed to renegotiate their financing structure, or both. Either path took time, and the seller's team was pushing for a fast close, in part because a slower process gives a buyer more opportunity to find things they do not like.

Personal exposure added another layer of urgency that the three had not fully weighed. Each of them was putting personal savings into the transaction alongside the loan, and each was leaving stable roles they had held for years to take on ownership. An overpayment baked into the price at closing would not simply be a company problem to absorb later; it would sit directly against the personal capital and personal guarantees each of them was contributing, in proportions that varied enough between the three that a lower purchase price mattered differently to each of them individually.

The most urgent piece, though, was one none of the three had fully appreciated until we raised it: several of the addbacks were not simply aggressive, they were internally inconsistent with the company's own financial records. The vehicle expense addback, for instance, assumed a personal-use percentage that did not match the mileage logs the company itself kept for insurance purposes. The consulting fee addback described the relative's work as discretionary, but the payments had been consistent, monthly, and tied to an ongoing arrangement that looked a great deal like a real operating cost the business would still owe once new owners were in place. These were not judgment calls a reasonable accountant could defend either way. They were errors, and errors in a seller's favour rarely get corrected voluntarily once a deal is moving toward close.

What we did

The fix here was not, in the end, a legal one. The real solution was accounting: someone independent needed to take the company's actual books and rebuild the earnings figure from the ground up, testing each addback against the underlying records rather than accepting the seller's characterization of them. Our role was to make sure that non-legal fix actually happened, that it happened on a timeline the deal could tolerate, and that once it produced a corrected number, the purchase agreement locked that number in rather than letting it drift back toward the seller's original figure.

We first advised the three buyers to pause the letter of intent's momentum without abandoning the deal, using the standard due diligence period every serious buyer is entitled to as the vehicle for that pause, rather than reopening a negotiation the seller might read as bad faith. Inside that window, we helped them retain an independent accountant with specific experience in quality of earnings work, distinct from both the seller's accountant and the buyers' own bookkeeper, to remove any appearance that the review was designed to reach a predetermined conclusion.

That accountant rebuilt the earnings base line by line: confirming the vehicle expense against actual mileage records, reclassifying the insurance settlement as the one-time item it plainly was rather than a recurring add-back, and testing whether the consulting arrangement with the owner's relative would in fact continue or terminate at closing, which determined whether it belonged in the addback schedule at all. The corrected adjusted EBITDA came in at roughly $1.85 million, materially below the seller's original $2.4 million figure, a gap large enough to move the implied purchase price by well over a million dollars at the multiple both sides had been using.

While the accounting review was underway, we kept the seller's team informed at a general level, that an independent review was standard due diligence practice, without signalling in advance which specific line items were under scrutiny. This mattered because a seller alerted too early to the exact concerns can sometimes rush to informally explain away a discrepancy before the accountant has had a chance to test it against the underlying records properly.

Once the accounting work produced a defensible number, our task became protecting it contractually. We rewrote the purchase agreement's price mechanism to reference the independently prepared earnings figure directly, rather than leaving the final number open to a post-closing adjustment fight, and we built in a defined process for how any remaining disputed line items would be resolved if the seller pushed back, using a named independent accounting firm as the tiebreaker rather than leaving it to negotiation under time pressure. We also confirmed the financing package could still be structured around the corrected, lower figure before the buyers committed to a final price, so the correction did not simply create a new problem on the lending side.

The outcome

The seller's team pushed back initially on the corrected figure, particularly on the reclassification of the consulting arrangement, but backed down once shown the mileage records and the payment history that made the original characterization difficult to defend. The parties ultimately settled on an adjusted EBITDA close to the independent accountant's figure, with a modest concession from the buyers on one smaller, genuinely debatable item, and the purchase price was reset to reflect that lower, defensible base before any binding agreement was signed.

Because the correction happened during the due diligence period rather than after closing, there was no post-closing dispute to manage, no clawback to negotiate, and no relationship with a former owner who remained involved in the business to repair. Valentina, Laszlo, and Gabor closed the buyout at a price that matched the company's actual earning power, financed on terms that reflected the real numbers rather than an inflated one, which meant their post-closing debt load matched what the business could actually service.

The lender, once shown the revised, independently verified figure, adjusted the financing structure accordingly and confirmed the debt-service coverage was comfortable at the corrected number, something that would not have been true at the original inflated figure once the business's real cash flow was tested against the loan's repayment schedule. That alignment between the purchase price, the earnings figure, and the financing terms was the direct result of catching the discrepancy before closing rather than after.

The problem this study describes is the one that never happened: a management team overpaying by more than a million dollars for a business based on an earnings figure nobody had verified. Catching it required accounting work more than legal argument, but the legal work mattered too, in pausing the deal's momentum long enough for that accounting to happen, and in making sure the corrected number, once found, could not quietly slip back out of the agreement under time pressure from a seller eager to close.

What you can learn from this