A seller once handed me the books for his business and said, here's the whole thing.
The whole thing was two things. A for-profit company and a nonprofit charity, run under one well-known name. He wanted to sell all of it as a single operation. The trouble started when I asked for the company's numbers on their own. He didn't have them. The two had never been pulled apart. So we rebuilt the for-profit's cost base line by line and pushed the shared expenses back where they belonged. On its own, the company's EBITDA was negative. The charity had been covering the gap for years.
The business he was selling, the profitable one everybody knew, only looked profitable because a charity he couldn't sell was quietly paying some of its bills.
That's an extreme case. The underlying problem is common, and it has a name worth keeping in front of you during any acquisition: The business you buy has to stand on its own.
Why the Business You Buy Has to Stand on Its Own
The number you underwrite is a claim about one thing: What the entity you're acquiring earns by itself, under your ownership, once the seller and everything attached to the seller are gone. Every multiple you apply assumes that figure is clean.
Commingling breaks the assumption. When two operations share accounts, staff, vendors, facilities, or a brand, the reported earnings of either one can be propped up or dragged down by the other. Separate them and the picture changes. Sometimes a little. Sometimes the whole deal.
This shows up constantly in the lower middle market, and usually not because anyone set out to deceive. Owner-operated businesses grow around the owner's life. A second venture, a personal property, a family member's role, a related company ... they get bolted on over the years and run through whatever accounts already existed, because there was never a reason to keep them at arm's length. Nobody needed the operations separated. Until a buyer did.
How Commingled Operations Distort Reported Earnings
Commingling wears a few common disguises.
A related for-profit affiliate. The owner runs a second business through the same purchasing account, the same payroll, sometimes the same bank. Costs move between the two with no allocation. The target's margins look better than they are because a sister company is absorbing some of the expense, or worse than they are because it's carrying someone else's.
The owner's personal activity. Personal vehicles, travel, a hobby operation, property upkeep, all run through the business. Some of this is standard addback territory. Some of it is a real cost of the operation dressed up as personal, which cuts the other way.
Related-party rent. The owner owns the building and charges the business a rent that isn't market. Below market flatters EBITDA. Above market deflates it. Either way the reported number isn't the one you'll live with.
A sister management company. Overhead, admin, or management fees sit in a separate entity. Depending on how those fees are set, the operating company can look leaner or heavier than a true standalone version would.
The nonprofit case. A charity or foundation runs alongside the company, often under the same name and the same roof. This one is different enough to deserve its own section.
Why You Can't Buy a Nonprofit (and What the IRS Rules Say)
The short answer is you can't. A nonprofit has no owner and no equity, so there is nothing to sell, and its assets are locked to charitable purpose, so they can't be paid out to a founder. When the entity absorbing costs or supplying revenue is a 501(c)(3), you have two problems stacked on top of each other.
The first is the standalone problem in a more severe form. Charities attract donations, grants, volunteer labor, and public goodwill that a for-profit can't replicate. If a meaningful slice of the "revenue" is really donation income, or if the charity's resources are subsidizing the company's cost base, then take the charity away and the number doesn't shrink. It disappears.
The second problem is that the charity isn't for sale, and can't be. A nonprofit has no owner and no equity. There is nothing to buy. Its assets are permanently dedicated to charitable purpose, which means they can't be sold off to a private buyer or paid out to the founder on the way out. On dissolution they have to go to another exempt organization or to a government, not to a person.
And if a founder tries to route the charity's value to themselves or to the new for-profit anyway, the tax rules bite. A founder who sits on the board is a "disqualified person" under Section 4958 of the Internal Revenue Code. Any transfer of charity assets to that person for less than fair market value is an excess benefit transaction. The excise tax is 25% of the excess benefit, and if it isn't corrected in time, another 200%. Organization managers who knowingly went along can be taxed as well. In the worst cases the organization loses its exempt status outright, retroactively. None of that is a liability you want to inherit, and none of it is something a seller can wave away at the closing table.
If the entity next door vanished tomorrow and you had to run the acquired business alone, on its own accounts, with no help from anything beside it, what would it earn? That number is what you're buying. Everything above it belongs to someone else.
How to Separate Commingled Financials in Due Diligence
Start by asking for standalone financials for the exact legal entity being sold. Not the combined picture the seller markets. The entity. If clean standalone statements exist, you're most of the way there, and your job is to verify them. If they don't exist, that absence is itself the finding. It tells you the operations have never been separated, and you are going to have to do it yourself.
Rebuilding a standalone view takes three passes:
- Reallocate the shared costs. Walk the vendor accounts, payroll, rent, and overhead, and assign each cost to the entity that actually consumes it.
- Strip the non-transferable revenue. Donations, grants, related-party sales, anything that won't follow the business to a new owner.
- Normalize what's left the way you would on any deal.
The figure that survives all three passes is the one your multiple attaches to.
Red flags worth chasing: One purchasing account or bank account serving multiple operations; a foundation or charity sharing the business's name or address; grant or donation income in the revenue line; no standalone P&L for the entity being sold; shared employees, equipment, or facilities with no cost-sharing agreement; a related management company collecting fees.
None of these is proof of a problem. Each is a reason to ask the next question before you trust the topline.
How Overstated Earnings Inflate the Purchase Price
The mechanics are simple once the principle is clear. Your purchase price is a multiple of sustainable, transferable, standalone earnings. Commingling inflates the base you would otherwise multiply. A $300,000 overstatement at a 5x multiple is $1.5 million of purchase price resting on earnings the business doesn't generate on its own.
In the charity deal, the base wasn't overstated. It was fictional. The company lost money without the entity that was never for sale.
The Bottom Line
A business can be real, beloved, and locally famous and still not be a thing you can buy at the price on the page. What you are acquiring is one entity's ability to earn on its own, under your ownership, with the seller and the seller's world removed. Before you underwrite a topline, find out what is actually being sold, what is merely standing next to it, and what the business looks like once you take everything else away. Sometimes the answer is a minor adjustment. Sometimes, as one seller learned when he tried to sell me a charity, there is no business there at all.
Common Questions
Can you buy a nonprofit?
No. A 501(c)(3) has no owner and no equity, so there is no interest to sell. Its assets are permanently dedicated to charitable purpose, which means they can't be transferred to a private buyer or paid out to the founder.
What is an excess benefit transaction?
It's when a nonprofit provides more than fair market value to a disqualified person, such as a founder on the board. Under Section 4958, the IRS imposes a 25% excise tax on the excess, and another 200% if it isn't corrected in time.
What does it mean for a business to stand on its own?
It means the entity being acquired generates its reported earnings by itself, without a related company, owner, or charity absorbing costs or supplying revenue. If a connected entity props up the numbers and isn't part of the sale, those earnings aren't transferable to a buyer.
How do you separate commingled business financials?
Ask for standalone financials for the exact entity being sold. If they don't exist, rebuild them: Reallocate shared costs to the entity that actually incurs them, strip out non-transferable revenue such as donations or related-party sales, then normalize what remains.
QoEPro provides buy-side Quality of Earnings reports for independent sponsors, search fund entrepreneurs, and private equity buyers in the lower middle market. We rebuild earnings on a standalone basis, so the number you underwrite reflects the business you are actually buying, not the one standing next to it. View report options →