Defending Working Capital and Earnings in a Professional Services Sale to Private Equity

The Situation

The firm was a specialized professional services business serving as assignee in Assignments for the Benefit of Creditors (ABC), a court-supervised alternative to bankruptcy in which a distressed company’s assets are transferred to a fiduciary who liquidates them and distributes proceeds to creditors. It is a niche practice with a small number of qualified providers, steady demand, and long engagements, and it had attracted a private equity buyer.

Buxbaum was brought in right as the deal was about to begin. The owner had a buyer, a price under discussion, books that had never been built for a transaction, and a finance team of one: a controller who had kept the firm’s books competently on a cash basis and had never been through a sale.

The Challenge

The firm’s accounting matched how it had always operated, not how a buyer would evaluate it:

• Cash-basis books. Revenue was recorded when cash arrived, and expenses when they were paid. Neither reflected when the work was done.
• Retainers billed up front. Engagements began with a retainer collected before any work was performed, so cash-basis revenue front-loaded income that on an accrual basis was deferred revenue and a liability.
• Long-term engagements with billing disconnected from effort. ABC assignments can run for months or years, with fees tied to estate milestones and asset dispositions rather than to hours incurred. In any given month, the cash collected bore little relationship to the work actually completed.
• No work-in-process methodology. With no way to measure how far along each engagement was, there was no way to state accrual-basis revenue, unbilled receivables, or deferred revenue with confidence.
• Financial statements the bankers could not use. The investment bankers marketing the firm needed a reliable earnings story, and the cash-basis financials could not provide one.

The people problem was as serious as the accounting problem. The controller was capable within the job he had been doing, but a private equity diligence process, with a request list running to hundreds of items and a buyer’s team expecting answers in days, was well beyond his experience and his bandwidth. He was, in the plainest terms, over his skis.

And the buyer knew how to use that. The private equity firm was sophisticated, experienced in these negotiations, and aggressive. It pressed for a working capital peg and debt-like item definitions that would have shifted meaningful value from the seller at closing. The owner knew his business but had never been through a transaction, and the counterparty was negotiating against a seller with no finance leadership on its side of the table.

What We Did

WIP methodology and revenue recognition. The first task was to define how the firm actually completed its work. We built an engagement-level work-in-process model that measured progress on each assignment against its expected scope and fee, drawing on the firm’s records of estate milestones, asset dispositions, and effort incurred. That gave us a supportable percent-complete basis for recognizing revenue under ASC 606 as the work was performed rather than as retainers were collected or milestone fees were paid.

Cash-to-accrual conversion. With the WIP methodology established, we converted the firm’s historical books to accrual basis. Retainers were reclassified from revenue to deferred revenue and released as work was completed. Unbilled work was recognized as a receivable. Expenses were matched to the periods they belonged to. The result was a monthly accrual-basis P&L and balance sheet that showed the firm’s true earnings pattern and, for the first time, a normalized view of working capital.

Sell-side quality of earnings. From the accrual financials we prepared the QoE: normalized EBITDA with documented owner and nonrecurring adjustments, revenue analysis by engagement type and duration, and a trailing twelve-month working capital analysis. Because the firm’s own financial statements could not carry the story, the investment bankers relied heavily on the adjusted financials we produced. The CIM, the management presentation, and the data room were built on our numbers, and they tied.

Hands-on management of the diligence request list. Rather than hand the controller a request list he could not fulfill, we took direct access to the firm’s accounting and billing systems and did the work alongside him. We pulled the data, built the schedules, prepared the responses, and walked him through each item so he could present it as the firm’s own. Where the buyer’s team asked for analyses that did not exist, we built them. The controller stayed in his seat and the firm kept operating, but the diligence responses came from a team that had done this many times before.

Working capital and net debt negotiation. This is where the engagement earned its value. We were on the phone with the buyer’s team and the owner, repeatedly, as the buyer pushed on two fronts: setting the working capital peg at a level that would have required the seller to leave excess cash in the business, and classifying deferred revenue and other ordinary operating liabilities as debt-like items that would reduce the purchase price dollar for dollar.

We built the seller’s position on both. On working capital, the accrual conversion gave us twelve months of normalized balances to demonstrate what a typical level actually was, including the seasonality of retainer collections. On debt-like items, we distinguished between true indebtedness and the ordinary liabilities of a services firm that collects retainers, showing that deferred revenue in this business was an operating item accounted for in working capital, not debt, and that treating it as both would have been double-counting against the seller.

The Result

The transaction closed with a private equity buyer, on working capital and net debt terms grounded in the firm’s actual accrual-basis financials rather than the buyer’s opening position. The owner negotiated from a documented, defensible view of the business instead of reacting to a sophisticated counterparty’s framing.

The diligence process moved at the buyer’s pace rather than stalling on a controller who could not keep up, and the bankers had a set of financials they could market with confidence. The buyer received what it needed as well: an accrual-basis view of a business whose cash-basis books had made its earnings pattern impossible to read, and a revenue recognition methodology it could carry forward under its ownership.

Why It Matters

Professional services firms that collect retainers and run long engagements are among the most likely to be on cash-basis books and among the most exposed in a sale because of it. Cash-basis revenue misstates both earnings and working capital, and a buyer’s team will use that ambiguity to its advantage on the peg and on debt-like items, which are where a great deal of purchase price actually changes hands.

The finance function of a firm this size is usually one person, and that person is almost never equipped for a private equity diligence process. That is not a criticism of the controller. It is a description of the gap every seller of this size has, and it is the gap a buyer’s team is best positioned to exploit.

The owner in this engagement was a skilled fiduciary who had never negotiated a sale. The buyer was a firm that negotiates sales for a living. Having a team on the seller’s side that could build the numbers, run the diligence, and argue the position on every call is what kept the terms fair.

If your firm bills retainers or runs engagements where billing and effort do not line up, and a transaction is possible, let’s talk about what a buyer will find in your books and how to be ready before they do.