The Lexicon of Capital

// HOW IT GETS GAMED

Every add-back is a claim about the future filed as a statement about the past. The seller asserts a cost which did occur will not recur — a forecast, formatted as history. The most abused category is "non-recurring," because recurrence is a judgment call rather than an accounting fact.

// HOW TO TEST IT

Three properties, all three at once: it traces to specific ledger entries rather than an advisor’s summary schedule; it stays non-recurring when you widen the window past the period the seller selected; and the counterfactual survives — remove the founder’s above-market salary and you must add back the cost of replacing what the founder did.

// HOW IT GETS GAMED

The averaging window is the lever. A seasonal business averaged across the wrong twelve months produces a peg materially below the level the business actually needs to operate — so the buyer funds the shortfall in cash after close, and calls it working capital rather than price.

// HOW TO TEST IT

Rebuild the peg on your own window, not the one in the draft agreement, and test it against the seasonal low point rather than the mean. Then check whether the peg reconciles to the same definition of working capital used in the model and the CIM — the three often quietly differ on cash, debt-like items and deferred revenue.

// HOW IT GETS GAMED

Not gamed by sellers so much as mispriced by the market. At a five- to six-figure engagement cost, a QoE cannot be deployed on every top-of-funnel look — so the deals that most need scrutiny, the small ones, receive the least. The industry treats verification as a late-stage audit rather than top-of-funnel infrastructure.

// HOW TO TEST IT

Separate the two jobs. Screening — does the bridge reconcile, do the add-backs trace, does the same EBITDA appear in all four documents — is cheap and belongs before the LOI. Attestation-grade QoE is a different product and stays where it is. Confusing the two is what makes the sequencing fail.

// HOW IT GETS GAMED

The bridge presents arguments in the visual grammar of arithmetic. A clean schedule in a familiar format reads as settled fact, when every line is a contested assertion. Length also works as cover: an eleven-line bridge is rarely challenged line by line under a deadline.

// HOW TO TEST IT

Read it as an argument, not a calculation. Assign each line one of three verdicts — traceable, unsupported, or contested — before you discuss the total. Anything not traceable to the ledger belongs on a challenge list before exclusivity, not in a QoE draft with three weeks left on the clock.

// HOW IT GETS GAMED

Measured on revenue rather than gross profit, so a large low-margin account looks like diversification. Measured at the legal-entity level, so three subsidiaries of one parent count as three customers. And measured without contract term, so a top account on a 30-day rolling agreement reads identically to one with four years left.

// HOW TO TEST IT

Recompute on gross profit, roll subsidiaries up to ultimate parent, and overlay remaining contract term. Then check churn among the customers who were top-five three years ago — the historical churn rate of large accounts predicts more than the current concentration percentage does.

// HOW IT GETS GAMED

Period selection is the lever and it is almost never examined. The seller chooses which months to annualize; a business with any seasonality, any large one-off order, or any recently signed contract can produce a run-rate that the trailing twelve months does not support.

// HOW TO TEST IT

Annualize every available window, not the one presented, and plot them. If the seller’s chosen period is the outlier, the run-rate is a selection, not a measurement. Then check whether the costs required to sustain that revenue were annualized on the same basis — they frequently are not.

// HOW IT GETS GAMED

The seller priced both sides of the transaction, then proposes the correction. Rent set above market creates a large, defensible-looking add-back. Rent set below market quietly inflates historical EBITDA and the buyer inherits a step-up in cost after close.

// HOW TO TEST IT

Source the market rate independently — a third-party appraisal or comparable lease, not the seller’s estimate. Then check the direction of the error: an above-market cost being normalized down is an add-back you should scrutinize, and a below-market cost is a liability nobody has put in the bridge at all.

// HOW IT GETS GAMED

The dispute lives in the definitions, not the thresholds. If the earnout is measured on EBITDA, whose definition governs — before or after the buyer’s allocated overhead, integration cost, new hires, changed accounting policy? Ambiguity that reads as immaterial at signing becomes the entire argument at measurement.

// HOW TO TEST IT

Write the measurement calculation as a worked example, with real numbers, and have both sides sign it as an exhibit. Then run three scenarios: base, aggressive integration, and a downturn. If any produces a defensible reading in which both parties believe they are owed, the definition is not finished.

// HOW IT GETS GAMED

Built top-down from an analyst report, then widened by redefining the category. The tell is a TAM whose implied unit economics contradict the company’s own reported pricing and cost structure — the market cannot be that large at the prices the company actually charges.

// HOW TO TEST IT

Rebuild bottom-up: units the company can realistically serve, times the price it actually achieves, times a defensible share. Then reconcile against the financials. Divergence between the narrative TAM and the numbers in the same document is the finding — we published the S-1 forensics on exactly this.

// HOW IT GETS GAMED

Committed, contracted and collected are three different numbers presented as one. Signed-but-not-started contracts, non-recurring services revenue, annualized pilots, and usage-based revenue extrapolated from a strong month all find their way into a single ARR figure.

// HOW TO TEST IT

Reconcile ARR to cash actually collected in the trailing twelve months and to recognized revenue in the financials. Then ask for the same figure split three ways: contracted and live, contracted and not yet started, and non-recurring. The gap between the headline and the first bucket is the real number.

// HOW IT GETS GAMED

A cost is removed entirely as "adjusted" when the honest treatment is to restate it to market as "normalized" — the difference is the whole add-back.

// HOW TO TEST IT

For every line, ask whether the cost disappears or merely changes size. If it changes size, the bridge should show the replacement, not a removal.

// HOW IT GETS GAMED

The seller charges a multiple for the buyer’s own value-creation thesis, then the buyer books the same savings again in their model — the synergy is paid for twice and delivered once.

// HOW TO TEST IT

Strike every unrealized saving from the bridge and re-run the price. If the deal only works with them included, you are underwriting your own plan at the seller’s multiple.

// HOW IT GETS GAMED

A short window, granted late, ensures the buyer commits before verification completes. Every day spent discovering something that could have been screened pre-LOI is a day of leverage transferred.

// HOW TO TEST IT

Move everything cheap to verify before the LOI. Enter exclusivity to confirm a thesis, never to form one.

// HOW IT GETS GAMED

Price is indicated off a CIM nobody has yet cross-examined, which makes every later correction look like a re-trade rather than a finding.

// HOW TO TEST IT

Treat the indicated multiple as conditional on the bridge reconciling, and say so in writing at indication rather than discovering it at week four.

// HOW IT GETS GAMED

Bankers run processes to compress IOI timelines precisely so ranges are set on the CIM alone.

// HOW TO TEST IT

Screen the CIM against the financials before the IOI, not after. It is the cheapest verification in the entire process and the one with the most leverage attached.

// HOW IT GETS GAMED

It is advocacy in financial formatting. Prepared by an advisor paid on outcome, it is structured to be persuasive and is routinely read as though it were disclosure.

// HOW TO TEST IT

Read it as a claim set. Every figure that materially affects price should reconcile to the financial model, the management presentation and the lender deck. Where four documents disagree, that is the finding.

// HOW IT GETS GAMED

Prepared under time pressure by a different team than the CIM, so figures drift. Drift is then explained verbally in the room, where it leaves no record.

// HOW TO TEST IT

Reconcile the deck to the CIM and the model before the session, and bring the deltas as questions. Ask for written confirmation of any figure explained verbally.

// HOW IT GETS GAMED

Discovery gets deferred into it because pre-LOI screening was too expensive to run. A confirmatory phase asked to do discovery work under a clock produces re-trades or missed findings, and usually both.

// HOW TO TEST IT

Ask what would have to be true for this phase to find nothing surprising. Anything on that list belongs earlier.

// HOW IT GETS GAMED

Platform diligence is thorough; the error is in what it inherits. An overstated platform EBITDA sets an inflated benchmark that makes later underperformance read as integration friction.

// HOW TO TEST IT

Fix the platform’s adjusted EBITDA to a ledger-traceable figure before the first add-on closes, and hold every subsequent bridge to the same standard.

// HOW IT GETS GAMED

Not gamed so much as under-examined. Sellers of small businesses are often unadvised and their bridges are informal, which makes errors more likely rather than less.

// HOW TO TEST IT

Standardize a screening protocol applied identically to every add-on regardless of size. Consistency across many small deals matters more than depth on any one.

// HOW IT GETS GAMED

Error compounds silently. Six add-ons in eighteen months, none individually large enough to justify a QoE, and the aggregate lands in the platform’s exit EBITDA — where a sophisticated buyer’s advisors find it and reprice at their multiple.

// HOW TO TEST IT

Track a running reconciliation of platform-level adjusted EBITDA against ledger-traceable earnings across the whole programme, not deal by deal.

// HOW IT GETS GAMED

The definitions of EBITDA used for covenant testing frequently permit add-backs the buyer would never accept in a purchase price — so a company can be comfortably compliant and structurally deteriorating at once.

// HOW TO TEST IT

Compare the covenant EBITDA definition against your own. Where the credit agreement is more permissive, headroom is overstated by exactly that difference.

// HOW IT GETS GAMED

Cohort selection decides the number. Excluding customers who churned within the period, or measuring only customers present at both endpoints, converts a mediocre figure into an excellent one.

// HOW TO TEST IT

Ask for the cohort definition in writing and recompute including every customer present at period start. Then ask for NRR excluding the top ten accounts.

// HOW IT GETS GAMED

Participation rights and stacked multiples accumulate quietly across rounds. A headline valuation can be maintained by granting structure instead of price, which preserves the story and transfers the loss to common.

// HOW TO TEST IT

Build the exit waterfall at several exit values, not just the optimistic one, and read what common receives. That number is the real valuation of the equity everyone is being motivated with.