Exit readiness in a tightened market

As private equity firms across Kentucky, Indiana, and Ohio seek strong exits amid economic uncertainty and heightened regulatory scrutiny, financial due diligence is more critical than ever.

A proactive, strategic approach—especially one focused on pre-quality of earnings (QoE) gap analysis and addback justification—can be the difference between a smooth transaction and a stalled or devalued deal.

The Role of Sell-Side Quality of Earnings
A robust sell-side QoE analysis is foundational to risk mitigation. It doesn’t just identify operational red flags or questionable accounting—it builds buyer confidence by clarifying a company’s earnings quality, cash flow reliability, and operational maturity.

Before formally entering the QoE phase, companies should perform a pre-analysis to uncover any hidden issues in financial reporting. Think of it as an internal audit: missing revenue adjustments or inconsistent accounting can slow down due diligence and damage valuation if uncovered too late.

For firms prepping portfolio companies for exit, this pre-analysis is essential. Redoing numbers mid-process can erode trust and delay the transaction. Instead, early identification of gaps in monthly and quarterly reporting ensures deal momentum is preserved as buyers enter the picture.

Key Midwest Insight:
In a region where many portfolio companies are founder-led or operate with lean finance teams, ensuring reporting consistency across entities can be a challenge. Tackling this head-on with a strategic QoE approach improves deal readiness and buyer confidence.

Why Addbacks Are Under the Microscope
EBITDA addbacks—adjustments made to normalize earnings—have become standard in M&A, but buyers and lenders are now applying more scrutiny. According to S&P Global, recent deals saw addbacks averaging 29% of projected EBITDA and over half of LTM EBITDA, raising alarms about projection accuracy and credit risk.

Buyers are pushing back, demanding not only quantitative breakdowns but also qualitative support for every adjustment. Addbacks lacking clear rationale can suggest inflated earnings or mask underlying business challenges, leading to valuation disputes or restructured deals.

What PE Firms Should Do Now:
Ensure management teams can justify addbacks with objective data and business context. Avoid excessive or recurring addbacks, and work with advisors to clean and standardize financials before launching a sale process.

Regional Relevance:
In our tri-state region, many deals involve companies scaling fast or navigating legacy accounting systems—both of which increase the likelihood of aggressive or poorly documented addbacks. Getting ahead of this scrutiny is essential to protect exit timelines and valuations.

Conclusion:
For firms operating in Kentucky, Indiana, and Ohio, exit readiness in today’s market means doing the hard work early. Conducting a pre-QoE gap analysis and tightening addback justification equips management with the insights and credibility needed for successful exits. In a tightened market, diligence preparation isn’t just smart—it’s essential.

Vaco is a silver partner of ACG Kentucky.

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For more information: Clif Freeman, Vaco Managing Partner and Highspring team.
Email: clif.freeman@vaco.com
LinkedIn: https://www.linkedin.com/in/freemanclif/

Article Link: https://www.highspring.com/blog/financial-due-diligence-understanding-exit-readiness-in-a-heightened-regulatory-environment/