How can I detect revenue pulled forward before a business sale?

Pulled-forward revenue is income recorded or collected earlier than the business would normally earn it, such as early billing, discounted prepayments or shipments timed to land before a cut-off. It can lift the latest period and make the trend look better than the underlying business. BDC says due diligence is where a buyer verifies that the numbers match the reality on the ground.

Start with the records that should agree

BDC lists accountant-prepared year-end financial statements for several years, tax returns and bank statements among the documents to review. It asks whether the figures match what the owner tells you and whether the tax returns match the financial statements. Gaps between what was reported and what was deposited are worth a written explanation from the seller.

Look at the pattern, not only the total

BDC points to trends in sales and profit margins, revenue by customer and slow-paying customers as items to examine. Compare the final months with the same months in earlier years. Ask whether any customer’s orders moved earlier, whether terms or discounts changed shortly before the sale, and whether receivables grew faster than sales. Where one customer holds a large share of sales, BDC says it can help to meet that client.

Use an accountant for a deeper test

BDC says a buyer can have an accountant prepare a quality of earnings report. It goes beyond standard financial statements to identify and adjust for non-recurring items, accounting irregularities and risks. Ask the accountant specifically to test the periods nearest the sale for early recognition.

Protect yourself in the agreement

BDC notes that there will usually be a purchase price adjustment for working capital at closing, and that the seller can agree in a covenant to run the business as usual until closing. If revenue was pulled forward, later months may be weaker, so ask your lawyer how the working capital adjustment and the seller’s representations would respond. See how customer concentration affects value for the related customer question.