5 ways sellers inflate TTM EBITDA — and how to catch each one

I've reviewed the financials on dozens of SMB acquisitions. The same patterns show up repeatedly. None of them are technically fraud. All of them will cost you money if you miss them. 1. Pulling revenue forward into the trailing twelve months. A seller knows their business is going to market. In the 6–12 months before listing, watch for unusual spikes in invoicing, prepaid service contracts billed upfront, or customers who suddenly pre-paid annual agreements. The TTM looks strong. The next twelve months won't look the same. How to catch it: Ask for monthly revenue going back 36 months, not just the TTM summary. A spike that started when they engaged a broker is not a growth trend. 2. Stopping discretionary spend the moment they decide to sell. Marketing goes quiet. Equipment maintenance gets deferred. The owner stops taking his full salary. None of this shows up as an add-back because technically it's real — expenses really did drop. But the business you're buying needs that spend to operate. How to catch it: Compare the last 12 months of opex against the prior two years line by line. Any category that dropped more than 30% without explanation is a question worth asking. 3. Reclassifying personal expenses as legitimate add-backs. This one is common and almost always described to you as "owner discretionary." The car lease, the hunting trip to Wyoming, the family health insurance running through the business, the home office that hasn't been used since###-###-#### Each item is small. Collectively they can represent $80–150K in inflated EBITDA on a typical Main Street deal. How to catch it: Request 24 months of bank and credit card statements. Every expense over $500 gets a category. Anything vague gets a receipt. 4. Normalizing revenue that isn't going to repeat. A one-time government contract. A large project that closed because the owner had a personal relationship with that client. A COVID-era windfall that's been included in the TTM without footnote. These aren't add-backs — they're presented as core revenue. They're not. How to catch it: Ask for a customer-by-customer revenue breakdown for the last three years. Any customer representing more than 15% of revenue gets a conversation about contract status and renewal likelihood. 5. Timing the close of the books. Year-end accruals, deferred expenses, and accounts payable that haven't been recognized yet. In cash-basis businesses — which is most of what you're looking at in the sub-$5M market — the owner controls the timing of when expenses hit. A seller with a March fiscal year-end and a planned listing in February has had time to think about what stays off the books until after your LOI. How to catch it: Run a proof of cash. Match every dollar of reported revenue against actual bank deposits. The gap, if there is one, tells you everything. None of this requires a $25,000 QoE to uncover. It requires knowing where to look — and asking the questions most buyers are too excited about the deal to ask.