A broker’s CIM should make you curious, not comfortable. It tells you what business to investigate. It doesn’t tell you what cash flow has survived contact with invoices, bank activity, customers, contracts, and the person who actually knows why the old owner keeps getting called at 7:15 a.m.
Call the gap claim-to-cash conversion. A CIM is released after an NDA and financial vetting, often as a 30-to-60-page document. In the lower middle market it may carry normalized EBITDA, a management section, and customer-concentration analysis. In Main Street, the earlier listing may be only a two-to-four-page summary built from tax returns and an SDE add-back schedule.
Either way, it’s your route into diligence. It isn’t diligence completed in a nicer font.
Your job is simple to name and unpleasant to skip. Turn each material claim into a record that can support a price, then preserve that record so you can compare the post-close business with what you bought. The word material earns its keep here. Not every sentence in the CIM needs a small army from you. The five claims moving the valuation do.
The Baseline
Freeze the seller’s evidence before the accounting system changes hands.
Preserve the general-ledger export, customer and invoice detail, payroll register, accounts-receivable aging, inventory listing, bank statements, tax returns, and normalization schedule in their received form. Record extraction date, reporting period, currency, entity boundary, filters, account mapping, adjustment, responsible person, and corroborating evidence.
Then keep three earnings labels separate:
- Reported earnings are the seller’s presentation in the CIM or recast.
- Adjusted earnings include the stated normalization judgments and add-backs.
- Verified earnings are reproduced from tested inputs; they are not audited unless an auditor says so.
That distinction prevents the oldest trick in transaction spreadsheets. A number starts as a seller claim, gets copied into your underwriting tab, and comes back from the copier wearing a suit called “base case.” A late credit note or a changed revenue cutoff gets a new baseline version, with the evidence that caused it. It doesn’t silently improve the original.
PCAOB AS 1105 supplies the right discipline even when the review isn’t an audit. Evidence obtained independently and directly is generally more reliable than internal or indirect information, and company-produced data needs testing for accuracy, completeness, and detail.
A management interview explains a variance. It doesn’t close one.
The Claims
Work from the claim outward, not from the CIM inward. Recalculation only proves that a workbook adds. It doesn’t prove that all the invoices exist, that the customers remain, that revenue belongs in the period, or that the target owns the equipment it says it owns.
Put the claim, proof path, owner, and price consequence in one checklist before any of it enters your valuation model.
| CIM claim | Source record | External confirmation | Cash trail | Diligence owner | Price consequence |
|---|---|---|---|---|---|
| Recast SDE or normalized EBITDA | General ledger, tax returns, normalization schedule | QoE reperformance | Bank statements and AR roll-forward | Financial | Re-trade or revised valuation baseline |
| Revenue is recurring | Customer and invoice detail, service contracts | Customer confirmation where relevant | Subsequent collection | Financial and operational | Earnout or lower price if support is weak |
| Major customers will remain | Concentration schedule, contracts, contact history | Customer introduction and confirmation | Cohort cash collection after close | Operational | Transition condition, holdback, or earnout |
| Receivables are collectible | AR aging and invoice population | Customer confirmation for material balances | Bank receipt and later collection | Financial | Working-capital adjustment or exception reserve |
| Equipment and inventory transfer | Inventory listing, serial register, title records | Physical inspection and count sheets | Later usage or sale | Operational | Purchase-price adjustment or closing condition |
| Lease and key contracts survive | Executed contracts and lease file | Landlord, counterparty, or consent evidence | Not applicable | Legal | Closing condition or excluded obligation |
Use the right assertion for each row: existence, completeness, cutoff, supportable amount, ownership right, or obligation.
The cash trail isn’t mandatory for every claim. A lease consent doesn’t become more real because you highlighted a bank statement, which is why the table has a “not applicable” lane.
The point is evidence fit, not ceremonial paperwork.
For revenue, reconcile the ledger to invoice detail, then tie receipts through bank activity and subsequent collection. Use the accounts-receivable roll-forward to separate a timing difference from a gap you can’t explain.
Keep an exception log with the claim, amount, source conflict, owner, required evidence, and disposition.
“Passed diligence” isn’t a disposition. It’s what you write when you’d rather not show your work.
The Clock
Your LOI starts pressure, not proof.
Its exclusivity period commonly runs 30 to 90 days. Seller-favorable terms often sit at 30 to 45 days, while buyer-favorable terms extend to 60 to 90. Small-business diligence commonly takes 30 to 60 days, and franchise or multi-location work can take 90. If SBA financing is involved, underwriting begins when the LOI is signed and typically adds 45 to 60 days.
Run three tracks together:
- Financial diligence tests QoE, tax returns, bank statements, AR aging, and the recast.
- Legal diligence tests contracts, leases, litigation history, licenses, and change-of-control survival.
- Operational diligence tests customer concentration, key-employee dependency, equipment condition, and the transfer plan.
Sequential diligence loses an exclusivity window by design. But a shorter window doesn’t improve your evidence. It only raises the cost of ignoring what’s missing.
The broker’s listing agreement, commission basis, and sale timetable belong to the process. A customer’s confirmed renewal, an invoice population, and a bank reconciliation belong to the acquisition case.
Don’t let the first category dress up as the second.
Before the Multiple
Use the symptom to find the broken stage before you argue about price.
CIM earnings change during diligence → the baseline claim is broken
QoE findings or an invoice-to-ledger exception is exposing unsupported reported or adjusted earnings. Re-trade the price, add protection, or take the claim out of your model.
Invoice detail, bank receipts, and AR aging don’t reconcile → the cash trail is broken
Test completeness, cutoff, and subsequent collection. Keep the unresolved difference in the exception log rather than treating cash as a substitute for revenue evidence.
A concentrated customer hesitates after the seller exits → the transfer mechanism is broken
Goodwill was assumed to transfer without a customer introduction, a named relationship owner, or a retained cohort key.
Key employees or suppliers don’t know who has authority after close → the operating perimeter is broken
Reconcile contracts, permissions, roles, and open jobs to your frozen baseline, and make the handoff visible.
The broker says another buyer is waiting → the decision clock is being confused with evidence quality
Negotiate process terms as process terms. Don’t call an untested claim verified because the calendar looks impolite.
The Handoff
Closing creates a second boundary.
Reconcile the closing statement line by line to your frozen baseline, separating ordinary trading from purchase-agreement adjustments, classification changes, errors, and items the seller retained.
Inspect cash and debt through bank and payoff evidence. Inspect receivables through aging and subsequent collection, inventory through count sheets and later usage or sale, and equipment through serial-numbered registers, title records, and physical inspection.
The seller’s transition period commonly runs 30 to 90 days. Use it to measure transfer before you optimize anything. Track customer accounts contacted, permissions transferred, open jobs accepted, supplier accounts activated, and critical roles still staffed.
Keep the same customer identifiers, product groups, accounting policies, reporting periods, and an acquisition tag until a documented bridge can translate the old measures. Otherwise the target disappears inside your consolidated reporting exactly when you need to see it.
The economic measures follow: cohort revenue, gross-margin movement, cash collection, backlog conversion, warranty or rework volume.
This matters because key-person discounts commonly run 10 to 25%, rising to 30 to 50% where customer relationships, vendor terms, or technical knowledge sit in one person. Customer attrition and key-employee departures cluster in the first 90 to 180 days after an ownership change.
That isn’t a soft concern. It’s your bill for unmeasured transition risk.
A CIM identifies the earnings case. A frozen baseline tells you what was actually bought. A signed LOI buys diligence time. Evidence earns the valuation.
Choose five claims. Name one evidence owner for each. Until the claim reaches the ledger, invoice, bank, confirmation, or later collection, it isn’t cash flow.