A revenue restatement and a former employee's letter arrived the same week

The situation

Pratheep called our office on a Tuesday afternoon, three weeks into the buyer's due diligence, to say the buyer's accountants wanted a meeting he did not feel prepared for. He and Tharshini, both anesthesiologists before they left clinical practice to build a scheduling and case-management platform for hospital anesthesia departments, were in the middle of selling the company to a larger health technology buyer, with Gita leading the diligence work on the buyer's side. This was Pratheep's second company sale; he had sold an earlier clinical software business years before and assumed he knew roughly what to expect from the process, having gone through financial diligence once already without any real difficulty.

The deal, once signed, would fall in the fifty-to-eighty-million-dollar range, reflecting several years of steady revenue growth as more hospital departments across the province adopted the platform. The letter of intent had been signed on the strength of financial statements Pratheep and Tharshini believed were accurate, prepared by their internal bookkeeper and reviewed annually by an outside accountant whose engagement had never gone beyond a fairly light review. Nothing in the sale process to that point had suggested a problem with the numbers themselves, and both founders had treated the diligence stage as a formality on the way to signing.

What the buyer's diligence team found, and what prompted Pratheep's call, was a pattern in how the company recognized revenue from a handful of its larger hospital clients. In several instances, the company had recorded revenue for software licences and implementation services at the point an order was confirmed, even where the customer had asked to delay actual delivery and go-live by several months, sometimes because the hospital's own systems were not ready to receive the platform. This is generally described as a bill-and-hold arrangement: revenue booked before the product is actually delivered or the service actually performed, held back at the customer's request. Handled correctly, with specific conditions met, it can be legitimate. Handled loosely, it inflates reported revenue in the period it is booked rather than the period the work is actually done, which is exactly what Gita's team believed they were looking at.

The buyer's accountants believed the company's version had not met those conditions consistently, and wanted the historical financial statements corrected before they would proceed any further with the transaction. Pratheep and Tharshini had genuinely not understood the practice as a problem; their bookkeeper had been recording revenue this way for at least three years, on instructions that seemed reasonable at the time, to reflect deals the company had genuinely closed even when delivery slipped for reasons entirely outside the company's control.

Why this was harder than it looked

A revenue recognition correction on its own is a manageable, if unwelcome, part of many diligence processes. Buyers find accounting issues, sellers restate, prices adjust, deals proceed on more accurate numbers, and everyone moves on. What made this file harder was that a second, separate problem surfaced in the same window, and the two were connected in a way that made each one considerably worse than it would have been alone.

About two weeks after the buyer's accountants raised the bill-and-hold pattern, a former sales employee, who had left the company roughly a year earlier on terms that were not entirely amicable, sent a letter through a lawyer alleging that he had been pressured to close deals using exactly this kind of early-booking arrangement, and that he had raised concerns about it internally before he left the company. He was not claiming the company had done anything criminal, but the letter combined a wrongful dismissal claim with a suggestion that the accounting practice Gita's diligence team had just found was not an innocent bookkeeping habit but something employees had flagged internally and management had allowed to continue regardless.

That timing created two compounding risks at once. First, the employment claim gave the buyer independent, external confirmation that the revenue issue was not a one-off oversight, which made it harder to characterize as a simple accounting correction and easier to characterize as a known and tolerated practice, a distinction that matters a great deal to a buyer deciding whether to trust the seller's other representations across the rest of the agreement. Second, resolving the two problems separately risked making both worse: settling the employment claim quickly and quietly, before the buyer knew its details, could look to the buyer, if it later found out on its own, like concealment layered on top of the original accounting problem; but disclosing the employment claim to the buyer before it was resolved risked handing the former employee more leverage in his own negotiation, since he would know the buyer was watching how the company responded.

Pratheep and Tharshini also had to reckon with what the restatement meant for the deal's price, separately from how either problem was managed. If bill-and-hold revenue had inflated reported growth for three years, the company's trailing revenue, and the valuation multiple the buyer had applied to it, both needed to come down by an amount neither founder could yet quantify with confidence. The two founders had to accept, mid-negotiation, that the number they had been selling on was not the real one, while simultaneously managing a former employee who now had reason to believe he held information the buyer would pay close attention to, and while still running the company day to day through all of it.

What we did

1. Engaged an accountant to reconstruct three years of revenue on a corrected basis, recognizing the bill-and-hold amounts in the periods delivery and go-live actually occurred rather than when orders were confirmed, so Pratheep and Tharshini had accurate numbers before negotiating anything with the buyer rather than disputing the buyer's own figures from a defensive position. Owning the correction, rather than contesting it, put the founders back in charge of the narrative.
2. Assessed the former employee's letter on its own legal merits, separately from the revenue issue, to determine what a wrongful dismissal claim of that kind was realistically worth, given the terms of his departure and the absence of any allegation of personal wrongdoing by Pratheep or Tharshini specifically. Keeping the two problems analytically separate, even while managing them together, stopped the weaker claim from inflating the stronger one's settlement value.
3. Advised against a quick private settlement with the former employee before disclosing the claim to the buyer, because settling first and disclosing later would have looked far worse if the buyer discovered it independently than disclosing early and managing the claim in parallel, openly. A buyer who learns of a quiet settlement after the fact reasonably wonders what else was handled the same way.
4. Disclosed both issues to the buyer's counsel together, presenting the restated financials and the employment claim as related but distinct problems, with our own assessment of each, rather than waiting for the buyer to connect them on its own and draw the least favourable conclusion available. Controlling how the two issues were first framed mattered as much as disclosing them at all.
5. Negotiated the purchase price down from the restated, corrected revenue base, rather than the original inflated figures, establishing a valuation both sides could defend, and structured a portion of the price as a holdback tied to any further accounting adjustments discovered before closing. This gave the buyer's accountants a mechanism to keep looking without stalling the whole transaction on their findings.
6. Settled the former employee's claim on modest, clearly documented terms once the buyer was already aware of it, closing that risk on a basis the buyer could see was reasonable rather than something concealed or rushed to make the deal look cleaner than it was. Documenting the settlement terms in writing also gave the buyer something concrete to evaluate rather than a vague assurance that the matter was resolved.
7. Rebuilt the seller representations in the purchase agreement around the corrected financial history, so Pratheep and Tharshini were not making promises about revenue figures they now knew to be wrong, protecting them from a later claim that they had misrepresented the company's financial condition after closing. Leaving the old representations in place, even by oversight, would have exposed the founders personally long after the sale proceeds were spent.
8. Kept Gita's team informed of the settlement timeline as it progressed, rather than presenting the resolved employment claim as a surprise late in the process, so the buyer's diligence conclusions were built on current information rather than on an issue it believed was still open and unresolved. Regular updates, even brief ones, did more to rebuild trust than any single piece of paperwork could have.
9. Reviewed the remaining active customer contracts for similar bill-and-hold language, confirming with Pratheep and Tharshini that the corrected accounting treatment going forward matched how the company actually delivered its software, so the restatement addressed the underlying practice and not just the historical numbers the buyer happened to have found. Leaving even one contract on the old treatment would have handed the buyer a fresh problem after closing.

The outcome

The sale closed roughly ten weeks later than the original timeline, at a price reduced from the initial letter of intent to reflect the restated revenue, with a holdback held in escrow for a period after closing to cover any further adjustments the buyer's accountants identified once they had full access to the corrected books. Pratheep and Tharshini did not get the valuation they had originally negotiated, and they accepted that outcome once they understood, from the accountant's reconstructed figures, that the original number had never accurately reflected the business they were actually selling.

The former employee's claim settled for a modest amount, on terms that closed the matter without becoming a larger dispute or a prolonged negotiation of its own, and the buyer proceeded with the acquisition knowing the claim had been resolved rather than hidden from view. That transparency mattered more to the final outcome than the settlement amount itself; a buyer who believes a seller disclosed a problem honestly behaves very differently in negotiation than one who suspects concealment, and Gita's team credited the founders for raising both issues before being asked.

This was a partial outcome, not a clean win. Pratheep and Tharshini sold the company they had built together, but at a lower price than they had believed it was worth going in, and only after two uncomfortable problems surfaced in the same month and had to be managed together rather than in sequence. What they avoided was worse: a deal that collapsed entirely over accounting questions neither founder could fully answer, or one that closed on numbers a buyer later concluded had been misrepresented, with legal exposure that would have followed both of them personally well past closing day. The correction cost them money at the table, but it also meant they walked away from closing with nothing still hanging over either of them.

What you can learn from this