01. Over-Reliance on Seller Adjusted EBITDA
The single most common defect in mid-market financial due diligence is accepting management add-backs at face value without verifying cash flow seasonality and maintenance CapEx realities.
Sponsors must cross-examine trailing-twelve-month adjustments against multi-year audited tax filings and bank reconciliation ledgers to identify persistent working capital drains.
02. Customer Concentration and Churn Disguise
Headline revenue growth often masks deteriorating retention within top revenue cohorts. When a company experiences 30% top-line expansion driven entirely by new discounting, underlying client attrition will rapidly erode enterprise value.
Rigorous cohort analysis isolates organic expansion from discounting-driven gross bookings, uncovering hidden margin decay.
03. Working Capital Target Manipulation
Sellers frequently accelerate accounts payable cycles or postpone inventory replenishment immediately preceding transaction close to inflate net working capital benchmarks.
Benchmarking normalized working capital across 24 monthly periods eliminates seasonality distortions and protects the acquirer from immediate post-close capital injections.