What Private Equity Looks for in Your Financial Reporting

Don’t Let Financial Reporting Trip You Up

If you’re a business owner or finance leader preparing for a Private Equity (PE) exit in the next 1–3 years, especially with EBITDA greater than $2 million, your financial processes & reporting can either strengthen your exit valuation or cost you dearly.

We’ve seen businesses with disorganized financials too many times to count. The most common quote we hear from Owners is, “When I look at my bank account, I know we are doing well because we have more money in the account than we did last year.” Owners wait until the last minute to clean-up their financials only because they know a sale is imminent. The last-minute clean-up creates immense stress on your entire team. Everyone is scrambling to find documents, employees are asking, “do you remember this one?”, and work grinds to a halt. Your Accountant asks questions that no one is able answer. Everyone is scratching their heads asking, “why they have to go through this fire drill.”

But, when your financials are finally presentable, the worst thing happens, you realize your business wasn’t as profitable as you thought. You ask, “How is this possible, I have money in the bank?” The situation continues south. Your Investment Banker is creatively generating add backs to make the business “look” more profitable and appease your unhappiness. Now, rather than your CIM referring to EBITDA, you only see the dreaded three letters, SDE (Seller’s Discretionary Earnings). SDE is a marketing term, calculated as EBITDA + Add backs. However, what all Buyers are after is EBITDA, not SDE. Now, rather than thinking you’ll get top dollar from a PE firm, your multiples are reduced and your buyer base has changed.

If your financials were clean from the start, you could have known exactly what profit your business was making and developed improvement strategies. You don’t have to wait until the last minute, you can take control now.

Below, we outline practical strategies and key concepts to help you start early and make a smooth and lucrative transition.

Why Financial Reporting Matters in a PE Exit

Private equity deal teams are experts at slicing through financial statements; their due diligence is sophisticated, and their expectations for robust reporting are non-negotiable. They have Analysts dedicated to working through financials. PE will always have the upper hand in Finance. For businesses greater than the $2 million EBITDA mark, clean and timely reporting is vital to attract serious interest, command favorable multiples, and sail through diligence. And, most importantly, it will give PE the confidence that you know your stuff and you’ll be in rarified air amongst the companies they review.

Key Financial Reporting Terms to Know

GAAP

Standardized accounting rules set by FASB & GASB, aimed at complete, consistent, and comparable financial statements. Required for most U.S. firms.

3+9, 6+6, 9+3

Rolling forecast formats (e.g., 3 actual months + 9 forecast months), used for up-to-date planning and budgeting.

EBITDA

Earnings before Interest, Taxes, Depreciation & Amortization—AKA, profit. A core measure of operational profitability and PE valuation.

Enterprise Value

Total company value (equity plus net debt).

Free Cash Flow

Cash available after capital expenditures—crucial for value and reinvestment analysis.

IRR

Internal Rate of Return: the annualized effective return from an investment.

Net Margin

Net profit as a percentage of total revenue—a bottom-line health indicator.

Pre-Exit (2-3+ years out): Think Like a Private Equity Firm

1. Upgrade Your Reporting Mindset

• Adopt a PE perspective: What would a buyer want to see? Rigorous, timely, and transparent financials—not just at year-end, but month-in and month-out.

• Implement “quality of earnings” reviews—either internally or, ideally, with an outside advisor to catch issues before due diligence.

2. Strengthen Your Finance Functions

• Ensure financials, management accounts, and board packets all tie back to the same data—consistency will save you headaches later.

• Train your finance team in PE-standard practices such as rolling forecasts (e.g., 3+9, 6+6) and scenario modeling.

3. Invest in the Right Tools

• Basic platforms like QuickBooks may not cut it for PE readiness. Consider modern ERPs (like NetSuite or Sage Intacct) to unify data, accelerate reporting, and provide real-time insights.

• Investigate data warehouse solutions for flexible analytics presentation—PE firms prize visibility into trends and drivers.

4. Adopt a Diligence-Ready Attitude

• Start assembling deal-room documentation: audited financial statements, tax compliance, customer contracts, employee agreements, and cap tables.

• Shore up compliance and mitigate any outstanding legal or taxation issues—PE diligence is thorough and will uncover gaps.

Post-Exit: Expect Changes and Embrace Them

• The first couple of quarters post-close may seem business as usual, but a full overhaul in reporting standards, expectations, and cadence is almost always coming by Q3 or Q4.

• Monthly and quarterly reporting packages, detailed operational metrics, and upgraded compliance checks will become the new normal.

• The upside: better processes will help you hit growth mandates, improve cash flow, and set the foundation for secondary value creation.

Action Steps to Maximize Enterprise Value

• Start Now: The sooner you upgrade financial processes, systems and reporting, the more credible your numbers become—and the more time you give your team to adapt.

• Build a PE-Ready Financial Package: Monthly reporting, rolling forecasts, reconciled accounts, KPI dashboards.

• Train and Upskill Your Finance Team: Help them speak the language of private equity, not just GAAP but the operational and strategic metrics PE buyers demand.

• Train your Operating Team: Teach them to be accountable for financials and understand key drivers

• Invest in Systems: Evaluate enterprise-grade ERP and analytic tools; automate wherever possible to boost accuracy and efficiency.

• Lean on Advisors: Third-party advisors can find—and help fix—weaknesses before they impact your valuation or slow down closing.

Improving your financial processes is a marathon, not a sprint. Start early and rely on trustworthy partners to help you with the transition. Never wait until you are ready to sell. The time and expense spent on upgrading your financial processes now will pay dividends when you exit. You’ll have confidence when speaking with Private Equity. And, most importantly, your exit will be significantly more lucrative.