The Banker Did His Job

Part I of a three part series

The EBITDA bridge had seven steps, and every one of them walked uphill. Reported EBITDA on the left at three million and change, adjusted EBITDA on the right at five, and in between a staircase of add-backs climbing from owner compensation through a one-time equipment repair to a normalization for a customer the company had already lost. The company was a machine shop in the Midwest, sixty people, good iron on the floor, real customers. The bridge was a work of art.

The CIM is the seller's best day, photographed professionally.

Paul W. Swaney III

Early in my deal career I read a document like that and got offended. I called the banker and walked him through everything wrong with his adjustments, item by item, in the tone of a man exposing a fraud. He listened politely, thanked me for the diligence, and sold the company six weeks later to a buyer who understood something I did not: nobody in that process was lying. The banker was doing his job. The seller was doing his. The only person in the conversation confused about his role was me.

I lost more than a deal that day. I lost the chance to buy a good business at a fair price because I mistook advocacy for deception, and the distance between those two things is worth real money. Every CIM you will ever read has been massaged. Once you accept that as the baseline condition of the genre, the massage becomes legible, and legible is the beginning of useful.

The Same Sheet Music

Read enough books on manufacturing businesses and you notice the moves repeat. The adjustment stack always opens with owner compensation and works downward in descending order of defensibility, from the salary the owner paid himself to the hunting lease that somehow served a business purpose. The projection curve bends upward the quarter after close, powered by initiatives requiring only modest capital and a sales hire the current owner somehow never got around to making in thirty years of owning the place.

The customer chart is drawn at exactly the altitude where concentration disappears. A fabricator doing forty percent of its volume with one OEM shows you a pie sliced by end market instead: aerospace, medical, industrial, defense, each slice a reassuring size, the single customer spread invisibly across three of them. The market page describes the global precision components industry in the billions while the company serves a two-state radius with four machines that matter. And there is always found capacity. Every manufacturing CIM I have read discovers a second shift that is significantly underutilized, as if the idea of running one simply never occurred to the man who built the company.

The uniformity is the point. This is a genre, like real estate listings and dating profiles, and a genre with fixed conventions is a genre you can read fluently once you stop expecting it to be a deposition.

Advocacy, Priced Accordingly

The banker's mandate is the seller's outcome. He is paid a percentage of the price to present thirty years of a founder's work in its best light, and the CIM is the instrument: a brochure with financial statements attached. Getting angry at it for being optimistic is like getting angry at a listing photo for the wide-angle lens. The lens is disclosed. Everyone in the room knows the living room is smaller than it looks.

What the amateur misses is that the massage is honest work performed inside known rules. A banker who invents revenue gets sued. A banker who presents real revenue in its most flattering arrangement earns his fee, and the arrangement follows conventions every professional buyer already knows by heart. The system functions because both sides understand their roles. The buyer who expects the book to do his diligence for him has outsourced his job to the other side's advocate, and he will receive exactly the outcome that arrangement deserves.

There is a mirror-image error worth naming, because I have made that one too. The buyer who reflexively disallows every adjustment and discounts every claim treats the genre as pure fiction, and he pays for his cynicism the same way the naive buyer pays for his faith: by getting the number wrong. Some add-backs are real. Some owners genuinely did pay themselves triple market and run the company conservatively. A machine shop I passed on for having a bridge I refused to engage with sold to a buyer who checked, adjustment by adjustment, and found most of the stack held up. The massage is information. Discarding it wholesale is as lazy as swallowing it whole.

So the professional response is symmetry. He advocates, you verify. He arranges, you rearrange. Anger has no place in the work, and neither does trust.

Reading It Back Into English

Fluency means translation, and the translations are learnable. Diversified end markets converts to an instruction: resort the revenue by invoice and see whether four end markets are actually one purchasing manager with four ship-to addresses. Long-standing customer relationships reliably means the founder holds them personally, which readers of my last piece will recognize as a Rainmaker disclosure hiding in plain sight. Entrepreneurial culture means there is no second layer of management, and strong reputation for quality, unaccompanied by a scrap number, means nobody measures scrap.

The hockey stick tells you when the seller decided to sell. Find the quarter the projections begin to climb and count backward roughly eighteen months, and you will usually land on the phone call to the banker. Everything after that date was managed with the exit in mind, which matters most on the maintenance line. A press that got its rebuilds on schedule for twenty years develops a suspicious frugality about parts in the two years before a sale.

A well-invested facility has a testable meaning, and the test is the depreciation schedule read against the equipment list. When the newest machine in the building is twelve years old, well-invested translates to paid-off, and the capex holiday the seller has been enjoying becomes the capex bill you are about to inherit. The same page usually claims capacity for growth, and the two claims argue with each other: a plant that is both well-invested and half-empty has either a demand problem or a definition problem, and the CIM is hoping you will not read the two pages in the same sitting.

The adjustment stack is the best personality test in the document. A short stack with clean items tells you the owner ran the business like a business. A tall one, where the family vehicles and the lake house taxes and the brother-in-law's salary all lived in the P&L, tells you the company has been run as a checkbook, which means the reported margins understate the business while the controls overstate it. Either way, the stack tells you more about how the place actually operates than the adjusted number it was built to produce.

What the Polish Points At

The most useful reading of a CIM has little to do with the numbers. Massage is effort, effort gets applied where it is needed, and bankers are too good at their jobs to waste polish on pages that stand on their own. The effort map is therefore a risk map. The customer section that names no customers. The year that appears only in a footnote under the revenue chart. The growth lever described entirely in the conditional tense. The plant photographed from the one angle that crops out the nineteen seventies.

On one book, the equipment list gave serial numbers and hours for every machine except the two that mattered, the five-axis mills running the highest-margin work. Those two received adjectives instead. I flew out, walked the floor, and found both machines a decade past their maintenance schedule with a controls package the OEM had stopped supporting. The banker never lied to me. He spent his adjectives exactly where the facts were thinnest, and once I learned to read his spending patterns, he could not help telling me where to look.

The management meeting works the same way, because the meeting is the CIM performed live. The tour follows a rehearsed route, and the route is an effort map too. Ask to see the machine that was not on it. Ask the question the presentation answered before you could ask it, and watch who in the room looks at whom before answering. None of this is hostile. It is just reading the second draft of a document you have already read once.

What This Means for a Fundless Sponsor

Institutional buyers have to negotiate against the book, because the investment memo has to cite something and the CIM is the citable document in the room. The banker's frame becomes the committee's frame, and the negotiation becomes a debate over which of his adjustments to disallow, conducted entirely on his field. I do not carry that constraint. Nobody is waiting for my memo. I can read the book once, as a table of contents with customer names, and then go build my own view of the business from paper that was never arranged for my benefit.

That is where this series goes next: the records that cannot hold a pose no matter who prepares the room, and after that, the book I write myself before I price anything. For now the lesson is the one that cost me a machine shop years ago. The banker did his job, the document was advocacy professionally executed, and being surprised by it was the only unprofessional act in the process.

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.