Before a sale or handover, managers lift the metrics the buyer or successor will price, such as EBITDA, growth, and retention, by deferring maintenance, risks, and personnel problems onto the new owners.
An example
Trailing EBITDA at a regional trucking company had risen 30 percent in the eighteen months before an investment firm bought it, and the price was set off that number. Four months after close, the firm's operating partner ran her first fleet review. Tractor replacement had stopped two years earlier, preventive maintenance intervals had been stretched, and a third of the trailers were past their planned service life. Two large shipping contracts had been renewed early at lower rates to lift trailing revenue. The retention figure in the data room had been calculated on a customer cohort that excluded accounts lost before a system change. Every number had been technically real. The capital plan for the next two years absorbed most of the cash flow the deal model expected.
Why it works
Deferred maintenance spending adds to EBITDA dollar for dollar, early renewals fatten the trailing window, and frozen hiring lowers costs, all multiplied by the valuation, so the deal looks better. The sale also gets easier, since clean financials mean fewer price adjustments and a faster process. The move works when the buyer prices off a few legible metrics, diligence is time-boxed and the seller curates the data room, indemnification caps the seller's exposure, and the deferred problems take long enough to surface that they appear after closing. Every reported figure can be accurate, which is why fraud checks rarely catch it.
The thinking behind it
George A. Akerlof Asymmetric information, from The Market for "Lemons": Quality Uncertainty and the Market Mechanism (1970): when sellers know quality and buyers cannot tell, buyers will pay only for average quality. A seller who knows maintenance has been deferred holds exactly that advantage. The buyer's defenses are to buy information, through quality-of-earnings work and operating diligence, or to shift the risk back with escrows and clawbacks.
Oliver E. Williamson Opportunism, from Markets and Hierarchies (1975): self-interest seeking with guile, which Williamson later described as including incomplete or distorted disclosure. Every reported number can be accurate while the disclosure is incomplete, which is the form this tactic takes. His point that contracts are always incomplete explains the defense: survival periods and multi-period scorecards safeguard what the contract cannot specify.
A. Michael Spence Signaling, from Job Market Signaling (1973): a costly action can reveal hidden quality only when it costs the better type less to send. Headline metrics a seller can lift by deferring maintenance are cheap for a weak business to produce, so they fail to separate strong businesses from weak ones. Buyers should weight evidence that is expensive to fake, such as equipment condition and the behavior of customers off the seller's list.
Warning signs
Sustaining capital spending and maintenance fall while headline EBITDA rises into the sale or handover window. Renewals get pulled forward. Resourcing follows the data room's metric list, and unmeasured maintenance programs lose funding. Metric definitions shift around revenue timing, retention cohorts, or what counts as capital spending. Difficult personnel conversations keep being postponed.
How to defend yourself
Run your own operating diligence if you are the buyer, and look at the business outside the metric list.
- Commission a quality-of-earnings review that normalizes EBITDA for deferred maintenance and pulled-forward revenue.
- Run channel checks, talk to customers off the seller's list, audit code or equipment, and track leading indicators of decay.
- Use escrows, clawbacks, and multi-period scorecards that extend the seller's accountability past closing, with survival periods long enough to matter.
- Ask for the metric definitions as they stood two years earlier.
Inside a company, a normalized handover audit does the same job when a manager moves on.
How a leader shuts it down
Extend accountability past the point where consequences show up: clawbacks, deferred pay, multi-period scorecards, and handover audits for managers who change roles. Keep metric definitions stable and publish any changes. Avoid letting a single scored moment decide pay or promotion. Before any review or sale, ask what spending was cut in the past two years and why.