The Accountant Said No

The call came on a Thursday. We had an LOI the seller had already reviewed sitting in his inbox, a price both sides had shaken on, and a seller who had told me across his own conference table that he was tired and his wife wanted him home. Diligence was underway. The quality of earnings was half built. And his voice on that Thursday was a different voice, careful and rehearsed, the voice of a man reading from someone else's notes. He wanted to slow things down and take another look at his options.

It took me two more conversations to trace it back. On Tuesday he had driven 40 minutes to sit with his accountant, the way he had every quarter for 25 years. He walked in a seller. He walked out something else.

The Man Who Signs the Returns

In a founder owned business, the outside CPA is rarely just the tax guy. This one had done the company returns since the founder worked out of a rented bay. He had drafted the covenant letters for the bank, sat beside the owner through a state audit, and did the returns for both adult kids. When the owner had a question about money that mattered, this was the number he dialed, and he had been dialing it since before I got my first job.

I had known the seller for six months. The accountant had known him for a career. In any contest between my deal book and his history, the history wins, and it should. What I failed to price in was simpler and harder than trust. The accountant loses his client the day the deal closes. His firm loses the company work, the personal work, the family work, all of it wired into a buyer's national firm within a year. Nobody in the process is paid to say that out loud, so it just sits there, shaping the advice.

A quality of earnings is an expensive way to discover an objection the CPA would have handed me for free in month one.

Paul W. Swaney III

What He Actually Said

I eventually got most of the meeting secondhand, and the frustrating thing is that almost none of it was wrong. We had structured the acquisition as an asset purchase, the way buyers in this market usually prefer. The accountant walked the seller through what that meant for him personally: depreciation recapture taxed at ordinary rates on equipment he had written down for years, a state tax bill on top of the federal one, and a net number meaningfully below the headline price he had been repeating to his wife.

Then he priced the rest of the consideration the way an accountant prices things. The earnout was a maybe, contingent on performance he would no longer control. The rollover equity was paper in someone else's company. And the business, as it sat, paid him more per year than the after tax proceeds would yield in the market. His exact framing, as it was relayed to me, was a question. Why would you trade a “sure” 700k a year for this?

There is a whole essay in what that question leaves out. Concentration risk, the value of his time, what happens to an owner-dependent business the year his energy fades, what the company is worth in a process he does not get to schedule. But as a piece of arithmetic delivered by the most trusted financial voice in his life, it landed. Of course it landed.

The Structure Handed Him the Argument

Here is the part I own. I had negotiated the headline number carefully and let the structure trail along behind it as detail work for the lawyers. The seller heard the price. The accountant read the structure. Those are two different documents, and I had effectively let the other side's most trusted advisor be the first person to translate one into the other.

The net-to-seller page, after tax, side by side against a keep-the-company scenario, is a page I should have built and walked him through myself in the first month. Every element the accountant attacked had an answer. Purchase price allocation can be negotiated. Tax character can be traded against price, and a buyer who understands the seller's recapture exposure can sometimes buy goodwill in both senses of the word. Cash at close can be weighted against the earnout. I had those answers and never got to give them, because I treated structure as plumbing, and the plumbing is where his advisor lives.

What I Do Differently Now

The first meeting with any founder now includes one question I never used to ask this early. Who else is going to look at this with you? The answer is a roster: the CPA, sometimes an attorney who did the estate plan, sometimes a golfing buddy who sold his own company and now grades everyone else's exit. That roster is the de facto investment committee on the other side of a founder deal, and the CPA usually holds the swing vote. I want to sit with that committee before I spend a dollar on diligence. A quality of earnings is an expensive way to discover an objection the CPA would have handed me for free in month one. So the sequence runs advisors first, QoE second: after tax math on the table, every concern heard while it is still cheap to answer, and the seller stacking up enough decisions and enough momentum that by the time the heavy spending starts, the deal is something we are building together and walking away carries a cost on both sides of the table.

And when I do get that meeting, the first thing I address is the thing nobody wants to name. I tell the accountant directly that I know what a closed deal costs his firm, and that I would rather keep good local advisors engaged through transition than swap them for a national firm that bills triple and knows nothing about the company. Sometimes that is a commitment I can make and sometimes it is only a conversation, but either way the incentive stops being the silent passenger in every piece of advice the seller hears.

When the accountant raises the tax problem in month one, it is diligence and I can potentially structure around it. When he raises it near the end of exclusivity, it is doubt, and doubt compounds in a seller the way interest compounds in a note.

This is also where operating alone stops being a handicap. There was no committee behind me to consult before offering to meet the accountant, no fund counsel to clear a structure change with, no partner meeting between his objection and my answer. When a second deal wobbled the same way months later, I had a revised structure in front of the seller's advisor inside a week, with the recapture math worked, and that deal kept moving. Speed is the one advantage a fundless sponsor always has in stock. It only works if you spend it in the right room.

The right room is a 40-minute drive from the seller's office, and it has been for 25 years. Get there first.

Paul Swaney is the founder of Swaney Group Capital, a fundless sponsor focused in the lower middle market. LeverUp® is published weekly. More if I have something else to say.