Middle-Market M&A Boom Exposes a Hidden Crisis: Sellers Aren't Ready for Due Diligence

Tom Gabbert has seen it happen enough times that he can almost predict the moment. A founder gets a call from a private equity firm, likes the number being floated, and decides to sell. Months later, deep in the due diligence process, something in the books doesn't line up — a revenue recognition inconsistency, a few years of non-GAAP accounting that nobody cleaned up, a spreadsheet standing in for a financial system — and the deal either falls apart or gets repriced downward in a way that stings. "Most deals don't fall apart at the beginning," said Gabbert, chief executive of Milestone Business Solutions Inc., speaking on April 8, 2026. "They fall apart during diligence or right after, when findings start to impact valuation and deal structure."

The conditions producing this pattern are not hard to understand. A large cohort of business owners built their companies over decades and are now at or near retirement age. At the same time, private equity has been moving steadily into smaller territory, targeting businesses with revenues under $50 million — in some cases well under $25 million — that would have been too small to attract serious institutional interest a decade ago. The global private credit market stood at roughly $1.7 trillion in assets under management as of mid-2023, according to Federal Reserve staff estimates, with direct lending accounting for nearly half of that. The money is there, and it is looking for places to go.

The result is a surge of unsolicited outreach to founders who may never have seriously considered selling. Gabbert said owners are fielding more of these approaches than ever before, and many are responding by exploring exits they had not planned. The problem is that being interesting to a buyer and being ready for a buyer are two very different things.

Scott Ehrlich, president of Mind the GAAP LLC, describes the financial problems that surface in sale processes as falling into two broad categories: weak operational infrastructure and outright technical accounting errors. On the infrastructure side, some growth-stage companies have never adopted U.S. GAAP at all, relying instead on simpler accounting methods that buyers — particularly private equity firms — find opaque or untrustworthy. When a company books revenue on a cash basis, or fails to record lease assets and liabilities on its balance sheet, or handles software license revenue in ways that don't match GAAP standards, buyers have to spend extra time reverse-engineering what actually happened. Often, they just lower their offer instead.

Even companies that do use GAAP can carry technical errors that only become visible under the scrutiny of a formal sale process. Ehrlich points to misclassified preferred stock or warrants, improperly handled stock compensation, and research-and-development costs that were capitalized when GAAP required them to be expensed. These are not cosmetic problems. "The adjustments made by PE firms and other buyers for these GAAP errors can cause a significant late-stage adjustment to the purchase price," Ehrlich said.

Revenue recognition is where Gabbert sees the most damage done. Companies that have applied it inconsistently across years, or that switched to GAAP partway through their history without restating earlier periods, leave buyers unable to make clean comparisons across time. A buyer trying to understand whether a business is growing, stable, or quietly deteriorating needs financial statements that tell the same story in the same language across multiple years. When they don't, confidence erodes fast.

The infrastructure gaps compound the problem. Many middle-market companies still run their finances on basic accounting software supplemented by spreadsheets. They may have never had a full audit — only a compilation or a review, which carry far less assurance. Monthly reconciliations may be inconsistent. Physical asset counts may not happen. When a buyer's team arrives and starts asking for detailed segment-level profitability analysis or customer-level revenue breakdowns, the company simply cannot produce them. "It's hard for a potential buyer to put faith in the financial results when the investment in accounting systems and processes lag the complexity and growth stage of the business itself," Ehrlich said.

Beyond the numbers, diligence also surfaces operational vulnerabilities that founders often underestimate: weak forecasting, contract risks, and — perhaps most common — heavy dependence on the founder personally. A business whose key relationships, institutional knowledge, and decision-making all flow through one person is a riskier acquisition than its revenue line suggests.

Gabbert's advice to owners thinking about selling is blunt: the preparation has to start well before the conversation with a buyer begins. Twelve to twenty-four months is the window he recommends for getting financials clean, systems upgraded, and controls documented. Waiting until a buyer is at the table is too late. Growth may be enough to get a meeting. It is not enough to get a deal done.