Glossary
Buy-Side Due Diligence
Buy-side due diligence is the financial investigation a buyer commissions before closing an acquisition, to confirm that the earnings and working capital they are paying for are real and repeatable. It is ordered by the buyer, paid for by the buyer, and written for the buyer alone. At Treewalk, our transaction advisory team runs this work as a Quality of Earnings engagement, and the number we hand back is almost never the number the seller presented.
What buy-side due diligence actually is
It is not an audit. Every report we issue opens with a Notice to Readers stating plainly that no assurance is provided on historical or forward-looking financial statements. An audit asks whether financial statements are fairly presented under a reporting framework. Buy-side due diligence asks a narrower and more useful question: if I buy this business on Monday, what does it actually earn on Tuesday?
That difference drives everything. We are not checking the seller’s bookkeeping for its own sake. We are stripping out the parts of reported profit that will not survive the change of ownership, then testing whether the balance sheet can support the business the day after close.
The work covers four things a buyer needs before signing:
- Normalized earnings, presented across two prior fiscal years and the trailing twelve months
- A verified cash trail, reconciling bank activity to the books
- A working capital target the business genuinely needs to keep operating
- The debt and debt-like items that reduce what the seller actually takes home
What we look for, and what we keep finding
Most of our targets are owner-managed small and mid-sized businesses, frequently on cash-basis bookkeeping in QuickBooks. Converting them to an accrual presentation is routine, not exceptional, and the conversion alone often moves the earnings picture.
The adjustments cluster into predictable categories:
- Personal expenses run through the company, typically vehicles, travel, and meals
- Owner and officer compensation, normalized to a market rate when the owner is leaving
- Family members on payroll at rates unrelated to the work performed
- Non-recurring items such as lawsuits, one-time settlements, and loan forgiveness
- Cut-off errors and misapplied accounting, including capital expenditures expensed in the wrong period
- Deferred revenue that never made it onto the balance sheet at all
The pattern we see most often is not fraud. It is a business that was run to minimize tax for a decade and is now being sold on profit. Those two goals point in opposite directions, and the gap between them is what the diligence surfaces. Sellers are usually surprised by their own numbers.
We present adjustments in three tiers, and this is the part buyers tell us they use most: management’s proposed adjustments, our own incremental adjustments, and potential adjustments where the facts are genuinely unclear. That produces three earnings figures rather than one, which is far more honest about where the negotiating room sits.
How we run the engagement
The methodology is the same on every deal, which is what makes the reports comparable.
| Phase | What happens |
|---|---|
| Kickoff | Management interviews, organizational structure, control environment, related-party map |
| Accounting policy | Revenue recognition, capitalization and depreciation, cash to accrual conversion |
| Quality of earnings | Normalize EBITDA, test supporting documentation, build the three adjustment tiers |
| Income statement | Revenue trends, customer concentration, seasonality, gross margin by line |
| Balance sheet | Proof of cash, AR and AP aging, related parties, unrecorded liabilities |
| Working capital | Set the net working capital peg on a cash-free, debt-free basis |
| Commitments | Off-balance-sheet leases, forward purchase commitments, contingent liabilities |
Proof of cash is standard on every engagement, reconciling receipts and disbursements separately rather than netting them. We treat roughly three to five percent net variance as an acceptable landing zone. Wider than that and we keep pulling.
Who hires us for this
Our buy-side clients are individual acquirers, search fund operators, small funds, and holding companies buying businesses in the range of roughly $1M to $15M in revenue. This is main street and lower-middle-market M&A, not private-equity megadeals, and the diligence has to be proportionate to that.
Most of the targets are US-based operating companies across field services, construction trades, healthcare staffing, medical device servicing, technology, and food and beverage. Avnit Sekhon, CPA, CA, Director of Transaction Advisory, leads the practice and signs the deal work.
Frequently asked questions
Is buy-side due diligence the same as an audit?
No. An audit provides assurance that financial statements are fairly presented. Buy-side due diligence provides no assurance at all. It is an investigative exercise for the buyer’s internal use, focused on normalized earnings and working capital rather than on statement presentation. Treewalk does not provide audit or attest services.
How long does a QoE engagement take?
It depends on the quality of the target’s records and how quickly the data room fills. Clean accrual books move fastest. A cash-basis, owner-managed set of books needs conversion work first, which adds time. We scope the timeline at kickoff once we have seen the general ledger.
What does it cost?
Fees depend on deal size, the state of the records, and scope. We quote each engagement after a short scoping call rather than publishing a rate, because a tidy set of books and a decade of commingled personal spending are very different jobs.
Do I still need it if the seller already has a QoE?
A sell-side report is prepared for the seller. It is useful, and we read it, but it was not written to protect your position. On most deals we still run our own procedures, using the seller’s report as a starting point rather than as a conclusion.
What do I actually receive?
A written report covering the executive summary points of interest, the accounting process, the quality of earnings tiers, net working capital and cash conversion cycle, income statement and balance sheet analysis, plus appendices with the due diligence procedures and the proof of cash by month and by account.
Where to next
If you have a target under letter of intent and want to know what the earnings really are, our transaction advisory services team is the right starting point. It helps to read the related pieces on EBITDA normalization adjustments and the net working capital peg first. To scope a deal, email Avnit Sekhon at avnit.sekhon@treewalk.com.
