By Chris Nix, Senior Managing Director, Private Equity Services
Introduction
Many founder-led businesses are built around growth and operational execution. As revenue increases and organizations expand, leadership teams are often focused on serving customers, managing operations, and pursuing new opportunities. Financial reporting, internal controls, and working capital processes, however, do not always evolve at the same pace. Most of the time, those gaps remain largely invisible until a company begins preparing for a sale, capital raise, or other significant transaction, when they come under meaningful scrutiny.
While buyers certainly evaluate growth and profitability, they also need confidence in the information supporting those results. Reporting consistency, working capital management, financial controls, and supportable earnings all play a role in how a business is ultimately evaluated when the time comes.
When Diligence Reveals More Than Adjustments
LCG’s QoE team was initially engaged to conduct a sell-side quality-of-earnings analysis, but the engagement quickly revealed areas that extended beyond traditional diligence considerations, requiring LCG’s strategic financial consulting team to step in. The business was operating successfully, but there were opportunities to strengthen the financial infrastructure that supports management reporting and decision-making. Working capital management, financial reporting, and internal controls all presented opportunities to improve visibility, consistency, and overall transaction readiness.
Rather than simply documenting observations, LCG’s QoE and Strategic Financial Consulting teams worked alongside management to address these issues and strengthen the company’s financial infrastructure before re-entering the market.
Bridging the Gap Between Performance and Presentation
LCG’s Strategic Financial Consulting team helped organize and refine financial reporting, strengthen internal controls, improve working capital processes, and enhance visibility into the company’s financial performance.
The engagement also identified an unfavorable factoring arrangement that was negatively impacting cash flow. By addressing the arrangement, improving collections processes, and implementing stronger financial disciplines, management gained a clearer understanding of the company’s underlying performance and financial position.
Importantly, these improvements were not solely about preparing for diligence. They helped create a stronger operational and financial foundation for the business itself. At the same time, they allowed management to present prospective buyers with a more credible and supportable financial story.
The Value of a Stronger Financial Foundation
By the time the company re-entered the market, buyers were evaluating a business supported by stronger reporting processes, improved controls, enhanced cash flow management, and greater financial transparency. The result was a more efficient diligence process, increased confidence in the company’s financial information, and a stronger representation of the business’s underlying value. Ultimately, the transaction resulted in the successful sale of one entity for nearly double the original offer that had previously been made for both businesses combined.
Conclusion
Quality of earnings analyses are often seen as a transaction requirement, but they can also serve as a valuable diagnostic tool for identifying areas where financial infrastructure has not kept pace with business growth. When those issues are addressed proactively, businesses are often better positioned to navigate diligence, communicate value to prospective buyers, and achieve stronger transaction outcomes. For private equity firms, investment bankers, and business owners alike, strong performance matters, but the ability to clearly support and defend that performance can be equally important during the transaction process.
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.
Whether preparing for a sale, responding to diligence findings, or seeking to improve financial reporting and operational visibility, LCG’s Transaction Advisory and Strategic Financial Consulting teams help companies position themselves for successful transaction outcomes. For more information, please contact Chris Nix at [email protected].