By Ryan Murphy, Managing Director of Transaction Advisory Services and Brian Smith, Co-founder & Managing Partner
The Widening Readiness Gap
In today’s M&A environment, a growing disconnect – known as the readiness gap – is emerging between how founder and family-led companies manage their financials and what sophisticated investors and lenders require to properly assess and close a transaction.
Many lower middle-market companies operate on a tax basis with limited financial segmentation. In contrast, buyers increasingly expect accrual-based statements, departmental granularity, GAAP conformity, and fully reconciled working capital schedules. Due diligence scopes have also expanded to include IT infrastructure, HR compliance, cybersecurity, state and local tax (SALT) exposure, employee classification, and more. While prudent, these expanded scopes introduce more stakeholders, increase complexity, and extend timelines.
At the same time, tighter credit conditions have led lenders to increase underwriting scrutiny and introduce prolonged financing contingencies. Yet, many sellers remain inexperienced in M&A and lack the internal resources or seasoned advisors to keep pace with these demands. Compounded by macroeconomic uncertainty, supply chain disruptions, and shifting regulatory landscapes, back-office investment is often deprioritized – further widening the gap.
The consequences are predictable: diligence delays, lender friction, last-minute surprises, and post-close issues. In many cases, these issues surface late in the process and require restructuring or extended timelines to resolve.
Performing the Capabilities Assessment
The capabilities assessment doesn’t reinvent diligence – it tweaks the typical pre-diligence protocol to shift the focus from pure data collection to evaluating the seller’s underlying ability to navigate the deal process. While standard reviews – such as examining key team resumes, assessing payroll data and turnover, evaluating ERP and accounting systems, and sampling customer or vendor master files – are still conducted, the lens shifts to what these inputs reveal about the seller’s sophistication, resource depth, and responsiveness under pressure. Most investors are eager to dig into core deal points and move swiftly toward closing, but it pays to slow down early and read between the lines. Subtle indicators around team structure, system maturity, and institutional knowledge often foreshadow whether diligence will be smooth or strained – and whether closing will be quick or chaotic.
Designing the Capability-Aligned Diligence Process
With a better understanding of the seller’s internal capabilities, buyers can build a diligence plan that preserves deal momentum and mitigates risk:
- Establish and Lock in a Realistic Timeline
Define a diligence calendar upfront with weekly deliverables and progress checkpoints. Account for holidays, family leave, and capacity constraints to keep expectations grounded and maintain momentum.
- Encourage Early Sell-Side Financial Prep
Where feasible, push sellers to complete a Quality of Earnings (QoE) analysis before signing the LOI. Clean financials reduce uncertainty and improve credibility with lenders.
- Advocate for Experienced Advisors
Sellers often rely on generalist CPAs or attorneys unfamiliar with the demands of private equity. Recommend experienced M&A counsel and financial advisors with relevant deal experience to streamline communication and documentation.
- Introduce Consultants as Needed
Fractional CFOs, IT specialists, or operational consultants can help fill skill gaps, drive preparedness, and ease the burden on seller teams. Consultants already engaged can also help shape post-close planning and build confidence around escrows or earnouts.
- Segment and Phase Requests by Function and Priority
Break diligence requests into categorized workstreams (e.g., Finance, HR, Legal, IT) and flag high-priority items early. Create several phases to the process. You can provide the entire list, but breaking it into phases reduces initial anxiety and keeps sellers focused on the right items at the right time. This helps overwhelmed teams triage and allocate resources efficiently.
Conclusion
The readiness gap isn’t going away – but buyers that take a structured, capability-aligned approach can close deals faster and with fewer surprises. By assessing the target’s internal capabilities early and tailoring diligence accordingly, stakeholders can focus resources where they’re most impactful and avoid unnecessary friction. In today’s market, execution speed and strategic focus are key to winning.
LCG Advisors is a leading financial consulting and transaction advisory firm specializing in mergers & acquisitions and other select advisory services. We offer a wide breadth of services, providing clients with one comprehensive source for high-level advisory expertise.
To schedule a Quality of Earnings analysis, contact Ryan Murphy, Managing Director, at [email protected].