What Transaction Advisory Services Pros Look for in Databooks and Tax Due Diligence

In the eyes of a transaction advisor, databooks are more than just numbers. They’re a business’s story. A databook – typically a detailed financial packet prepared for buyers or sellers in a deal – summarizes the company’s financials, key performance indicators and performance trends. But behind those line items is a narrative we’re hired to test. We must ensure this story is compelling as well as non-fiction. Wishful thinking and accuracy often don’t mix. 

We sat down with several Transaction Advisory Services (TAS) teammates to discuss how they handle databook preparation and tax due diligence – from sniffing out red flags to highlighting EBITDA adjustments, net working capital trends and tax traps hiding in plain sight.

Start with the Story

Matthew Evanoff sums it up best: “Make sure the financial information tells the same story told to our team during all the meetings before it was delivered.” Translation? If a company says they’re on a hockey-stick growth trajectory, but the numbers show erratic revenue and expense swings, we have a problem.

That’s why one of the first things many team members do is zoom in on inconsistencies. “Inconsistent gross margin, large fluctuations in monthly operating expenses and anything that makes you raise an eyebrow – that’s what I’m after,” says Matthew.

Craig Kampmier adds another layer, looking at volatility through the lens of standard deviation and statistical modeling. “If something’s bouncing around outside the norm, I’m digging in,” he says. “Whether it’s aggressive accruals or macro impacts like tariffs, we must understand the ‘why’ behind the fluctuation.”

Adjusted EBITDA: Finding the Real Operating Picture

We all love a good ‘adjusted’ number but cleaning up EBITDA is more than just sweeping away the oddball expenses. It’s like investigative accounting with a sharp focus on what truly drives business value.  

Matt Ochwat looks for things like personal expenses, executive recruitment costs and non-business employee compensation that can be carved out. He says, “Talk to management. Ask what’s really recurring. If someone’s cousin is on payroll but won’t be post-transaction, that’s not part of the future state.”

Additionally, he recommends: “Group like-natured accounts. Always dig into consulting fees and odd credits within expense accounts and debits within revenue accounts – the low-hanging fruit for EBITDA adjustments.”

Meanwhile, Jake Beesley watches for phantom margin hits. “I’ve seen companies record COGS before revenue, artificially tanking margins. You can’t trust the surface-level trend – you must follow the breadcrumbs,” he advises.

Net Working Capital (NWC): It’s All About Timing

NWC adjustments are often the hidden battleground in deals. Matt walks through it methodically: “You have to understand aged receivables, payables in dispute, and debt-like items such as deferred revenue and current long-term debt. It’s not just what’s there. It’s how it got there and what it really means.”

Jake dives into accruals and prepaids: “Prepaid insurance and subscriptions can throw off timing. Same with bonus accruals or commissions paid in arrears. If a cost isn’t booked but the service already happened, you’ve got a mismatch.”

And don’t forget about reserves. Matt says, “Accounts receivable and inventory reserves are judgment calls. Has management ever written stuff off? What’s their methodology? We have to stress-test their assumptions.”

Seasonality is another silent killer. “When you’re proposing a NWC peg,” Matt continues, “make sure it’s not built on a seasonal high or low. That’s an easy way to get burned.”

Revenue Recognition, Headcount and Hidden Trends

Matt and Jake both hammer home the importance of revenue recognition. Is it point-in-time or over-time? Are returns, rebates and discounts properly accounted for? A misstep here can lead to overstated earnings – or worse, legal exposure.

Buyers should also keep a sharp eye on customer deposits or unearned revenue – those sneaky line items that look like revenue even though no work has been performed. These liabilities may sit quietly on the balance sheet like they’re minding their business, but post-close, they become real obligations that haven’t yet hit the P&L. Miss them, and you risk a margin profile that looks great on paper until the expenses roll in and reality hits after the ink is dry.

Team members also flag management shifts and headcount trends. “Has the CFO changed three times in 18 months?” Craig asks. “Is the Company cutting back staff quietly while maintaining the same expense run rate?”

Jake looks at customer-level revenue trends. “Even if topline looks fine, if a key customer is pulling back, that’s a risk the buyer needs to know about.”

Tax Due Diligence: More Than Just Returns

While the financial side gets a lot of airtime, Sharif Ford reminds us that tax due diligence is just as crucial. “Reviewing tax returns only shows part of the picture. Diving into state income and sales tax nexus issues, sales tax taxability determinations, independent contractor misclassifications and more are critical tax due diligence exercises too. These hidden liabilities have a way of showing up after the deal closes or when it’s too late to reprice.”

The company’s structure plays a key role in strategic tax diligence during mergers and acquisitions, whether you’re buying or selling. Thoroughly examining the structure helps spotlight key risks and unlocks otherwise unnoticed planning opportunities.

For buyers, the target entity type helps identify the diligence exercise’s scope and potential issues that may arise – such as missteps with S corp classification rules – or signal paths to better outcomes, like using an F reorganization to preserve a basis step-up opportunity.

For sellers, understanding how your corporate structure impacts a deal allows you to anticipate questions, shore up weak spots and avoid surprises that can delay or derail a transaction.

At the End of the Day…

The team agrees: databooks aren’t just spreadsheets. They’re detective work, story shaping and business judgment all rolled into one. The numbers need to align with the narrative. Fluctuations, one-offs, accounting quirks – these aren’t just noise. They’re clues. And we’re here to follow them wherever they lead. That includes digging into the tax side of the story – where exposure can be hidden in plain sight and the right structure can unlock meaningful value. Solid diligence doesn’t just explain the past. It sets up the deal for success.

Databooks don’t lie but they don’t always tell the whole truth either. Our TAS team knows what to look for and where deals can go sideways. Let’s talk before the ink dries.