4 avoidable exit strategy mistakes for PEGs

Scott Sachs
10/4/2022
4 avoidable exit strategy mistakes for PEGs

Our specialist offers tips on how to avoid the most common exit strategy mistakes we see from private equity groups (PEGs).

When a company is preparing an exit strategy, it’s easy to begin with the end in mind – setting up the deal to best maximize the company’s investment. But some common mistakes can result in failed or delayed exits or cause a reduction in the valuation received on the portfolio company. Here are four of the top mistakes – and how to mitigate them well before they become major issues.

Mistake 1: Lack of clarity about a company’s financial statements

Sometimes a company hasn’t invested resources in accounting and finance, or the CFO might be busy with day-to-day responsibilities, but if nobody at that company is charged with long-term financial vision or financial viability, it can cause issues before an exit. The team might lack the knowledge or resources to answer questions about details of or impact on financial statements, including:

  • What capital expenditures does the company plan to make in the near future?
  • What are the company’s current financial models and forecasts for future business activity?
  • Does the company have adequate financial resources to continue operations?
  • What are the seasonal or cyclical variations to the company’s revenue streams?
  • What is the company’s gross profit margin? Is it increasing or decreasing?

Taking the time to track down these answers (as opposed to having answers at the ready) can cause a delay in the due diligence process – which, in turn, can create doubt in the buyer’s mind about the financial health or financial infrastructure of the target company. This doubt can significantly increase the risk of delaying or killing the deal.

Mistake 2: Lack of integrated systems and people infrastructure, especially after multiple acquisitions

After multiple companies are acquired, the first areas of focus tend to be around people integration, revenue optimization, and cross-selling. Integrating back-end systems tends to fall off the radar, because it’s not directly related to revenue improvement. However, that lack of integration can affect the revenue in a major way, creating significant cost inefficiencies over time due to a need for more people, more manual processes, and timely integrated data to run operations. This lack of integration can make it challenging to pull together necessary information for the due diligence process or consolidated monthly results with pro forma adjustments. That's why when acquiring a company, it's important to be ready to establish and implement systems integration upon the completion of the acquisition.

Mistake 3: Inability to prepare timely and accurate financial forecasts

Typically, companies should prepare quarterly financial forecasts covering planned earnings before interest, taxes, depreciation, and amortization (EBITDA); cash flow; and operating performance. However, if companies aren’t investing enough time or resources in their accounting and finance departments, these reports can easily get overlooked or be inaccurate – which can seriously affect an exit. While the best way to avoid this issue is to keep reports up to date in the first place, companies also can get their reporting back on track by building a forecast model, using a forecast tool, or engaging a third-party provider.

Mistake 4: Existence (or potential existence) of compliance issues, including state and local tax, sales tax, payroll tax, or benefit plan compliance 

Many companies don’t have the time or resources to invest in properly monitoring their compliance, and they often don’t realize the severity of the issue until they begin their exit planning. The largest and most serious issues generally arise from the lack of compliance with state and local taxes – specifically sales tax – resulting from nexus issues. Companies might fail to file and pay state and local taxes in the appropriate state and local tax jurisdictions, which opens a potential tax exposure in both the current tax year and previous tax years.

Looking ahead

Mitigating these mistakes before exit is essential to realizing the value of an investment. Companies should establish an operations integration plan for initial and all add-on acquisitions. This plan should include systems integration, quarterly financial reporting and forecasting, and investments in finance and accounting personnel.

Audit services for PEGs 

If you have your PEG’s exit strategy needs covered, you might be looking for an experienced auditor who understands your business and can perform a quality audit. With deep financial and PEG knowledge, our team is big on the right audit experience, offering a timely and independent perspective. 

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Scott Sachs
Partner, Audit & Assurance