Exiting a portfolio company can be a complex and high-stakes process. Identifying and addressing the signs that a portco may not be exit ready is critical to maximize value and ensure a smooth transaction process.
Tony Esposito, Managing Director at Consero, and Josh Welk, Founder and Managing Partner at Full Guard Capital, joined ACG’s Middle Market Growth podcast to share critical signs that indicate a portfolio company may need more preparation before pursuing an exit, along with actionable steps to address each issue.
1. Weak Finance and Accounting Functions
A weak finance function can be a major red flag for potential buyers. As Tony Esposito explains, “What we really preach here at Consero is being audit-ready, being able to close the books quickly, and then also having a scalable system infrastructure in place.”
| Signs You’re Not Ready | How To Fix |
|---|---|
| -Lack of audit-ready financial statements -Slow book closing processes -Inadequate system infrastructure -Weak FP&A capabilities -Finance being treated as a “necessary evil” rather than a strategic function | -Ensure financial systems are audit-ready and scalable. -Elevate finance from a “necessary evil” to a strategic partner in the business. -Develop a robust financial planning and analysis (FP&A) capability to answer sophisticated buyer questions. |
Esposito emphasizes, “Without that strong FP&A, it could be tough to answer a lot of the questions that more sophisticated buyers are going to have during a due diligence process.”
2. Insufficient Management Team Depth
Buyers value a strong and cohesive leadership team that can drive future growth and minimize post-sale risk. As Josh Welk points out, “We look more broadly at, ‘What is the quality of the management team, the depth of the management team?’ because you could have a very good business, but the predictability of future success often boils down to the quality and depth of the management team.”
| Signs You’re Not Ready | How To Fix |
|---|---|
| -Over-reliance on one or two key individuals -Lack of a complete C-suite team -Missing expertise in critical business areas -Unclear succession planning -Misalignment between management and ownership on exit goals | -Build a deep bench of leaders beyond one or two key individuals. -Focus on succession planning to ensure continuity. -Highlight team alignment and readiness during buyer discussions. |
“As buyers look at trying to define value and interest and an opportunity,” Welk added, “they want to know that that team is ready. And the less work they have to do to build the team, the more value you can create at exit.”
3. Unprepared for Due Diligence
The due diligence process can be exhaustive, and being unprepared may lead to delays, reduced valuations, or even broken deals. Welk emphasizes, “Being prepared for due diligence, especially if you’ve never been through the process before, it is a painful process. It’s not fun for either side.”
| Signs You’re Not Ready | How To Fix |
|---|---|
| -Disorganized or incomplete documentation -No maintained data room -Missing or outdated contracts and customer information -Lack of systematic record-keeping -No regular updates to critical business documentation | -Maintain an up-to-date data room with financials, contracts, and operational details. -Conduct a sell-side quality of earnings analysis before launching the process. -Be transparent about any known risks or liabilities. |
“We encourage all of our teams to actively think about what goes in the data room,” Welk advises, “maintaining logs and tracking that information on a monthly basis, put new contracts, customer information, financial statements, etc., in one key place.”
One of the biggest challenges in any acquisition process is speed, and “the more prepared you are for due diligence, the smoother and more profitable the process will be for everyone involved,” added Tony Esposito.
4. Unresolved Business Issues and Lack of Controls
During the due diligence phase, any issues that arise from failing to professionalize financial processes can undermine trust and result in valuation downgrades or funding challenges.
Welk adds, “If there are trends in the due diligence process of feeling like we were surprised or something popped up… you become skeptical and start to think, ‘What else is out there? What else is being hidden?'”
| Signs You’re Not Ready | How To Fix |
|---|---|
| -Undisclosed tax liabilities -Unresolved legal matters -Customer concentration risks -Regulatory compliance gaps -Operating inefficiencies | -Transition to scalable ERP systems and establish strong internal controls. -Regularly update financial models and forecasts to reflect accurate performance. -Engage third-party advisors for expertise in finance, legal, and other key areas. |
Transparency about potential problems is crucial. As Esposito explains, “The most important thing is to be just transparent and upfront with issues, because that could come back to rear its ugly head down the road if a company isn’t.”
Welk noted, “Buyers need confidence that the numbers align with reality. If they don’t, valuations and trust can erode quickly.”
5. Neglecting Business Operations During Exit Preparation
A preoccupation with the exit process at the expense of day-to-day operations can derail both the transaction and company performance. “The number one thing that can derail a transaction is distraction from running the business,” says Welk. Things are getting in the way. You’re focused on the deal; you’re focused on due diligence… and all of a sudden, the numbers start to trend down.”
Leadership teams should prioritize:
- Maintaining strong business performance during the exit process
- Leveraging third-party resources for due diligence
- Keeping day-to-day operations running smoothly
- Building and maintaining strong team alignment
- Clear communication about post-transaction plans
During the exit process, Welk and Esposito recommend leveraging third-party advisors to handle due diligence task so leaders can prioritize running the business effectively and aligning the management team and private equity sponsor on exit goals and vision.
Recommendations for Exit Preparation
Timeline Planning
Esposito recommends, “Our suggestion at Consero to companies that are looking to go through an exit is to have a readiness assessment completed well in advance of a transaction. We usually say 12 to 24 months ahead of time is a great time to engage a third-party.”
Companies should focus on:
- Starting readiness assessment 12-24 months before intended exit
- Engaging third-party advisors early in the process
- Developing clear milestones and objectives
- Creating and maintaining internal scorecards
- Regular progress monitoring against exit goals
Professional Support
“The more you can push the day-to-day due diligence execution of the deal process onto third-party advisors, the more you can stay focused really on driving the business,” advises Welk.
Key support considerations include:
- Building a strong support team for the exit process
- Hiring experienced industry advisors
- Conducting sell-side quality of earnings analysis
- Maintaining relationships with legal and accounting partners
- Leveraging PE sponsor expertise when available
Start Today to Get Ready for Tomorrow’s Exit
Recognizing and addressing these signs early can significantly improve the chances of a successful exit and maximizing valuation. Leveraging third-parties can help strengthen financial systems, build leadership depth, and prepare for due diligence while allowing leadership to stay focused on business performance. As Tony Esposito emphasizes, “The earlier you can bring in third-party advisors and address readiness, the better.”
This is part three in a three-part series on Exit Readiness. Read our coverage on part one of our conversation on Exit Readiness here and part two on How CFOs Maximize Value in Exits here.
