DUE DILIGENCE INSIGHTS
In the movie The Sixth Sense, the twist at the end changes everything you thought you knew about the story. When you watch it a second time, you realize the clues were there all along—you just didn’t recognize what they meant.
Buying a multifamily property—or any operating business—can feel the same way. The “surprise ending” is not a plot twist; it is discovering, after closing, that the deal you thought you bought is not the deal you actually own.
The difference is that in real estate or M&A, you do not get to roll the credits and walk out of the theater. You are stuck with the consequences—cash flow shortfalls, capital calls, covenant issues, and uncomfortable conversations with investors.
Due diligence is your second viewing of The Sixth Sense. Your job is to see the clues before the ending, not after.
“The surprise ending isn’t a plot twist — it’s discovering, after closing, that the deal you thought you bought is not the deal you actually own.”
The Sixth Sense analogy: no surprise endings
Think about the movie’s structure:
- The facts never change between the first and second viewing.
- Only your interpretation of those facts changes.
In transactions, the same is true. The rent roll, bank statements, invoices, contracts, and financials are what they are. What changes is whether you ask for the right information and interpret it correctly:
- Did you look beyond headline revenue to see its quality and repeatability?
- Did you distinguish between recurring income and one-time or non-repeatable items?
- Did you uncover timing tricks and hidden costs that distort Net Income in the short term?
If you do not, you risk walking into your own surprise ending—only this time, the twist comes in the form of a missed distribution, a covenant breach, or a painful write-down.
For multifamily buyers: the occupancy vs. collections trap
On the multifamily side, one of the most common twists is the gap between reported occupancy and economic occupancy. On paper, a property might show 95% occupancy, but if a meaningful slice of those tenants are seriously delinquent, your real paying occupancy is much lower.
This is why buyers should always request and scrub:
- Detailed rent rolls (not just a summary), including move-in dates, rent amounts, and current balances.
- Aging reports showing how much is 30, 60, 90+ days past due.
- Trend data, not just a single snapshot—how delinquency and occupancy have moved over the last 6–12 months.
The red flags are often there. You just have to ask for the right reports and read them with a skeptical, pattern-focused eye.
For operating businesses: beyond the P&L
For other types of businesses, the same Sixth Sense logic applies, but the clues live in different places. A careful buyer looks beyond the top-line Profit and Loss statements and digs into the underlying engines of revenue, cash, and working capital:
1. Invoice-level review and Quality of Earnings
A clean-looking P&L can hide messy realities. Reviewing sample invoices and customer ledgers helps you spot:
- Large one-off settlement payments or unusual projects that inflated revenue in the last year.
- Income from extraordinary transactions outside the company’s normal lines of business.
- Short-term pushes (e.g., deep discounts or bundled services) that may not repeat.
The goal is to separate recurring, core earnings from noise.
2. Revenue timing and window dressing
Sometimes the issue is not what was earned, but when it was recognized:
- Prepayments booked in a way that boosts current-period revenue without matching the related costs.
- Income pulled forward at year-end to make results look better for a sale or financing.
On the flip side, sellers may delay paying certain expenses (or stretch payables) to artificially increase Net Income in the short term.
3. Accounts Receivable (A/R) aging and collection reality
The A/R aging report is the business equivalent of a rent roll plus delinquency schedule. A buyer should ask:
- How much revenue is still unpaid, and how long has it been outstanding?
- What percentage of billings historically convert to cash, and on what timetable?
- Are there large, concentrated exposures to a small number of customers?
A high A/R balance with heavy aging often signals collection issues that the P&L alone will not reveal.
4. Accounts Payable (A/P) aging and hidden obligations
The A/P aging report shows what the company owes and whether it is stretching vendors:
- Large lump sums in payables that were delayed to flatter Net Income.
- Chronic late payments that may damage vendor relationships or lead to tightened terms.
- Unpaid liabilities that will hit cash soon after closing, effectively reducing the purchase price.
5. Balance Sheet and working capital needs
The Balance Sheet and SG&A analysis tell you what it really takes to run the business safely:
- How much working capital (cash, receivables, inventory) is needed to support operations without constant stress.
- Whether liabilities (debt, leases, accrued expenses) are manageable given the earnings profile.
- Whether SG&A is properly sized or temporarily suppressed (e.g., under-investment in staff or systems) to make margins look better.
Underestimating working capital needs is a classic way to end up with a post-closing surprise.
What sophisticated buyers are really doing
Across both multifamily and operating businesses, sophisticated buyers and their lenders tend to focus on similar themes:
- Quality and durability of earnings – not just how big the number is, but how likely it is to repeat.
- Cash conversion – how reliably and quickly revenue becomes cash.
- True cost to operate – including deferred CapEx, SG&A, and working capital requirements.
- Alignment between story and data – whether the seller’s narrative is actually supported by invoices, ledgers, contracts, and aging reports.
Like in The Sixth Sense, the facts are there the whole time. The question is whether you choose to see them.
When you treat due diligence as your second viewing—slower, more careful, and focused on the clues—you are far less likely to be shocked by a twist ending after closing and far more likely to buy assets and businesses whose stories you already understand.
Kelley Clarke secures your investments and protects your future.
Frequently Asked Questions
What is buyer due diligence in a real estate or business acquisition?
Buyer due diligence is the careful review of a property or company’s financials, contracts, and operating data before closing. Think of it as a second viewing of the deal: rent rolls, bank statements, invoices, contracts, and aging reports are examined closely so the buyer recognizes red flags before they become costly post-closing surprises.
What is the difference between physical occupancy and economic occupancy?
Physical (reported) occupancy counts units that are leased, while economic occupancy reflects the rent actually being collected. A multifamily property can show 95% occupancy yet have far lower paying occupancy if a meaningful share of tenants are seriously delinquent, so buyers should look past the headline number.
What documents should a multifamily buyer request during due diligence?
Buyers should request detailed rent rolls (with move-in dates, rent amounts, and current balances), aging reports showing 30, 60, and 90+ day delinquencies, and trend data covering the last 6–12 months rather than a single snapshot. This reveals how occupancy and collections have actually moved over time.
What is a Quality of Earnings review?
A Quality of Earnings review is an invoice-level analysis that separates recurring, core earnings from one-time items such as large settlements, extraordinary transactions, or short-term discounts. It helps a buyer understand how durable and repeatable a company’s revenue really is, rather than relying on a headline profit figure.
Why do A/R and A/P aging reports matter when buying a business?
Accounts Receivable (A/R) aging shows how much revenue is unpaid and how reliably billings convert to cash, while Accounts Payable (A/P) aging reveals whether a seller is stretching vendors or delaying payments to flatter Net Income. Both expose obligations and collection risks that a Profit and Loss statement alone will not show.
What financial red flags should buyers watch for before closing?
Common red flags include revenue timing tricks and prepayments that inflate the current period, expenses or payables stretched to boost Net Income, heavy or concentrated A/R aging, underestimated working capital needs, and SG&A that has been temporarily suppressed. Each is a sign the seller’s story may not match the underlying data.
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The author of this article, Jon Keith, is a finance and technology executive with 20+ years leading corporate finance, risk, and digital transformation across legal, energy, real estate, and manufacturing sectors. Currently, he serves as the CFO at Kelley Clarke, PC and was, concurrently, serving as the CEO of Way Maker Real Estate Partners, a registered broker-dealer. Jon holds an MBA from SMU’s Cox School of Business, as well as BBA (Accounting) and BA (Economics) degrees from The University of Texas at Austin. He maintains Series 7, 24, and 63. Passionate about community impact, he serves on the Board of Directors for the Texas Neurofibromatosis Foundation and has previously held board officer roles with Embrace Texas. Jon helps organizations grow profitably while managing risk and modernizing their operations.
