I’ve seen this pattern repeat across multiple transactions: a buyer — PE fund, family office, or strategic acquirer — runs a rigorous financial due diligence. Reviews the financial statements, validates revenue, adjusts EBITDA.
And then, six months after closing, discovers that the company needs $30M in additional working capital to operate normally.
The problem wasn’t in the EBITDA. It was in the balance sheet.
Why this happens
Traditional financial due diligence focuses on the income statement. It makes sense: that’s where profitability lives, that’s where you validate the purchase multiple.
But the income statement doesn’t tell you how much capital the company needs to generate those profits. That’s in the balance sheet — and specifically in working capital.
What should be reviewed and usually isn’t
1. “Normalized” working capital vs. actual working capital
Many companies “clean up” the balance sheet before a sale. They accelerate collections, liquidate inventory, stretch payments to suppliers. The working capital you see at closing doesn’t reflect the business’s normal operations.
You need to reconstruct the average working capital over the last 12–18 months, not just at closing.
2. The cash conversion cycle by customer and by product
Not all customers and not all products have the same cycle. A customer who pays at 30 days and another who pays at 120 days look the same in consolidated EBITDA. They are not the same in terms of capital required.
If the company has concentration in slow-paying customers, the capital requirement is structurally higher.
3. Assets that appear on the balance sheet but generate nothing
Obsolete machinery, obsolete inventory, assets on loan. These appear on the balance sheet at book value and inflate the ROIC denominator — making the real return on productive assets look lower than it appears.
4. The real maintenance capex
Adjusted EBITDA typically excludes capex. But if the company has been deferring maintenance for 2–3 years to look better during the sale process, there’s a bill to pay. That deferred capex doesn’t appear in any financial statement — it has to be detected operationally.
How to do it right
A rigorous operational due diligence requires:
- Month-by-month working capital reconstruction (not just at closing)
- Inventory turnover analysis by SKU or category
- Accounts receivable aging analysis by customer
- Physical review of fixed assets
- Interviews with the operations team, not just the CFO
The result is not just an adjusted EBITDA. It’s a real historical ROIC and an estimate of the incremental capital needed to operate and grow the company post-acquisition.
That information changes the valuation — and sometimes, the decision to buy.
Sintelo applies these models to companies you want to acquire. Before you close the deal.