Vendor due diligence: what the CFO must fix before the report

The exit queue is the starting point for any CFO preparing a sale. Bain & Company's Global Private Equity Report 2026 estimates the stock of unrealised buyout assets at roughly 32,000 companies worth $3.8 trillion, and puts the average holding period at exit at about seven years, against five to six years in 2010–2021. Almost 40% of companies are now held for more than five years, up from 29% in 2019. Every one of those companies will, at some point, need a buyer.

Demand has not disappeared. Bain records global buyout-backed exit value up 47% to $717 billion in 2025, while the number of exits fell 2% to 1,570. Value recovered faster than volume because a handful of very large transactions dominated. Bain's separate M&A report puts global deal value at $4.9 trillion for 2025, up 40%, and says more than half of the companies in its executive survey are preparing assets for sale within the next few years. For a mid-sized seller the implication is blunt: capital is available, but it gravitates to the best-evidenced assets.

Buyers with choice behave differently. They sequence bids, ask for more evidence before engaging, and reprice at the first inconsistency. A CFO who treats the sale as a corporate event to be handled in the final quarter will meet that behaviour with a half-reconciled data room. A CFO who treats it as a controlled disclosure exercise, begun a year earlier, meets it with a short list of known issues and documented answers. The difference shows up in price, in timetable and in whether the process completes at all.

There is also a governance point. Boards approve exit timetables on the assumption that the financial story is settled, yet the finance team often discovers during preparation that three versions of earnings exist: statutory, management and covenant. A buyer will ask for all three and will ask why they differ. Reconciling them is not a technical exercise for the reporting firm; it is a decision about which definition the company will stand behind in public, and it belongs on the board agenda early.

What to do: set a decision date for the sale route, then work backwards. Name one finance owner for the preparation programme and list the five numbers a buyer will test first: adjusted earnings, net debt, working capital, cash conversion and the forecast. Ask whether each can be reconciled to the ledger today. The answers decide whether to commission a vendor due diligence report now, or to spend a quarter on repairs first.

EY's Australia private equity update for the second quarter of 2026 reports that Australia's share of Asia-Pacific private equity deal value fell to approximately 15% from 24% a year earlier, and that Australia recorded 19 exits in the first half of 2026 against 25 in the first half of 2025. EY notes that exit volumes improved on the first quarter of 2026, which it reads as momentum building into the second half. Sellers should expect buyers to be selective rather than absent.

Bain's Asia-Pacific report shows why the Australia–New Zealand market feels demanding. The buyout share of ANZ deal value dropped to 62% in 2025 from 87% in 2024, implying a buyer universe less dominated by classic buyout houses, each type testing different things. Region-wide, Bain records exit value up 24% and exit count up 8%, with trade exits growing by more than 60% and IPO value by more than 70%. A seller now has to satisfy trade buyers who read the numbers for synergy, and financial buyers who read them for leverage.

Holding periods lengthen the problem. Bain reports that the number of Asia-Pacific portfolio companies held for more than five years rose 18% in 2025. In the United States, FTI Consulting, using PitchBook data, counts about 1,400 investments from 2018–2022 deals still held beyond the retention seen in earlier cohorts, nearly 11% of a 13,500-company inventory. Long-held assets carry long histories: acquisitions, restructurings, accounting policy changes and management turnover. A buyer's accountants will find each place where history and current numbers diverge, so the seller's finance team should find them first.

What to do: map the last three to five years of financial history into a single change log covering acquisitions, disposals, accounting policy changes, system migrations, restatements and one-off events. Ask which events a buyer must understand to trust the trend. Write one paragraph for each and keep the supporting schedules ready. This log becomes the spine of vdd report preparation and shortens every later conversation with the reporting firm.

Vendor due diligence (VDD), also called sell-side due diligence, is a report commissioned by the seller, written by an independent accounting firm and shared with prospective buyers. Deloitte Australia describes its aim as proactively identifying and addressing potential issues early in the process, minimising any value erosion, and says it understands the concerns of private equity buyers when they assess quality of earnings, net working capital and net debt. PwC's UK practice says a vendor report can give purchasers greater certainty over the characteristics of a company's cash flow and reduce the need for substantial buyer access.

Those statements come from firms that sell the service, so a CFO should read them as claims to be tested rather than evidence. The logic is nonetheless sound. A sell-side report moves the first and most contested analysis of earnings from the buyer's side to the seller's. It does not remove the buyer's own work. It changes the starting point of the negotiation from the buyer's first draft to the seller's documented position. That is valuable only if the document is accurate, and it is accurate only if the finance function has done its homework.

Timing matters. Efeso, an operational advisory firm, states that the process starts between two and six months before the typical sales cycle begins and moves through four stages. That is one vendor's view, but it is consistent with the time needed to reconcile, test and document a set of accounts. Starting the report on the day the sale is announced leaves no room to fix what the first draft reveals, and a report that arrives late tends to be written around issues rather than resolving them.

Independence is the source of the report's value and its limitation. Buyers give weight to a vendor report because the reporting firm is not the seller's employee, and because the firm carries professional responsibility for what it writes. The same independence means management cannot dictate conclusions. CFOs sometimes expect the report to advocate; it will describe. The practical consequence is that every point management would prefer to present differently has to be resolved in the evidence, before the draft, not in the wording.

What to do: decide scope early. Choose between a financial-only report (earnings, cash flow, net debt, working capital) and a wider one that adds tax, commercial and operational sections. A narrower report that is right beats a wider one with open questions. Agree with the reporting firm who owns each schedule, what management provides and when, and how disagreements are settled. Treat the draft as a test: if the CFO cannot defend a number to the firm, the CFO cannot defend it to a buyer.

Quality of earnings analysis starts with reported profit and arrives at a maintainable level of earnings by removing items that do not recur and adding items that distort the run rate. The skill lies in the policy, not the arithmetic. A buyer will accept an adjustment when it is classified consistently across periods, supported by documents and explained in a sentence. It will contest one that appears only in the year the seller needs it. Because adjusted earnings are multiplied by the deal multiple, a small disagreement about earnings becomes a large disagreement about price.

Five categories of adjustment attract most challenge: owner and related-party costs; one-off or non-recurring items; pro forma effects of acquisitions, disposals and price changes; capitalised costs and changes in accounting policy; and run-rate adjustments for contracts won but not yet earning. For each, the buyer asks the same question: would this item have been treated this way if the business were not for sale? A CFO who can answer yes, with evidence, keeps the adjustment. One who cannot should drop it before the buyer does.

The Karter McKinley position is that normalisations should be settled in a written policy before the report is commissioned. The policy lists each category, the test applied, the evidence required and the approving officer. It is applied to every period, including periods that flatter the case less. This protects value in two ways. It prevents the reporting firm spending fees on re-litigating judgement calls, and it signals to buyers that adjusted earnings were prepared by method rather than by negotiation.

A related discipline is consistency between documents. The information memorandum, the management presentation, the budget pack and the report will all quote earnings, and buyers read them side by side. A figure that differs by a rounding choice invites a question; one that differs by a definition invites a price reduction. Appoint one person to own the single reconciliation of earnings figures across every document, and require every external document to quote from it.

What to do: build a bridge from statutory profit to adjusted earnings for each of the last three years and the current year to date. Tag every adjustment with its category and source document. Remove any you would not accept if you were the buyer. Ask someone outside the deal team, such as the audit committee chair, to review the bridge and the policy. If the bridge does not reconcile to the ledger and the accounts, stop and repair before spending on a report.

Headline earnings attract attention, but the equity price is set by enterprise value less net debt, adjusted for working capital. Deloitte Australia names net working capital and net debt as core buyer concerns alongside quality of earnings. These are also the areas where definitions are most easily argued, because the sale agreement, not the accounting standard, decides what counts as debt-like and what level of working capital is normal.

Four items cause most trouble. Seasonality can make a single month-end peg unrepresentative. Customer deposits and deferred revenue look like liabilities in one analysis and working capital in another. Accruals and provisions can be released or built close to a sale. And debt-like items such as leases, unpaid taxes, deferred consideration, employee entitlements and deferred capital expenditure can flatter cash if they are ignored. Each moves price dollar for dollar, and none can be settled by argument during exclusivity, when the seller has least leverage.

Cash conversion tells the buyer whether earnings are real. If adjusted earnings rise while operating cash flow lags, a buyer's analysts will assume the gap sits in receivables, inventory or capitalised cost, and will price accordingly. A CFO should be able to explain the gap in a table that reconciles earnings to operating cash flow for each period, with every reconciling item traced to a ledger movement. This is dull work, and it is exactly what a credible report depends on.

Management bandwidth is the hidden constraint in this work. The same finance team that closes the month, supports the audit and answers the reporting firm's queries is usually the team running the business as well. A CFO should plan the preparation like a project, with a named backfill for routine reporting, a weekly cadence for open points and a single list of outstanding data requests. Without that discipline, the report is late, the data room is patchy and the buyer notices.

What to do: compute monthly net working capital for at least two years on one consistent definition. Agree the proposed peg methodology with the reporting firm, then test it against seasonality. List every item that could be described as debt-like and decide, with advice, which you will concede and which you will resist. Do all of this before any buyer sees a draft, because concessions offered early cost less than concessions extracted late.

Insurance claims data shows where weak preparation eventually surfaces. Aon's claims study, published in 2025 by an insurance broker, reports that 2024 was the highest year on record for M&A insurance payouts, that claims notifications in EMEA rose 26%, and that disclosure-related breaches represented almost 30% of warranty and indemnity (W&I) claims in Australia and New Zealand. These are one broker's clients rather than a market census, but the direction is consistent with what sellers hear from advisers.

In EMEA, Aon found that breaches of financial statement warranties were the biggest driver of paid claims at 27%, followed by compliance with laws at 13.2% and material contracts at 11%. In APAC the top driver was material contracts at 19%, with legal compliance, tax and licence permits each at 12.5%. The pattern is plain: the topics that diligence reports cover are the topics that generate disputes once the cheque has cleared.

Buyers who use W&I insurance rely on the sell-side and buy-side work to define what has been disclosed and what has not. A report that is vague on a topic, or silent on it, leaves room for later disagreement. A report that is precise gives the insurer, the buyer and the seller a common record. For the CFO, disclosure quality has a price after completion as well as before it: unresolved questions become claims, retentions and uncomfortable conversations with a former buyer.

Disclosure is also a matter of tone and record-keeping. A seller who is open about a known issue, with a clear explanation and a quantified effect, usually loses less than one who leaves the buyer to discover it. The record matters too: dated schedules, version-controlled data rooms and a log of questions and answers give all parties a shared history. That history is what insurers, lawyers and, in the worst case, a tribunal rely on when memories differ about what was said.

What to do: run a pre-report disclosure review. For each warranty area in your standard sale contract (accounts, tax, contracts, compliance, employees), write what is true, what is uncertain and what you would disclose against. Ask the reporting firm to cover the topics where the answer is uncertain. Keep the working papers, because the same evidence will support the disclosure schedule and the insurer's questions later.

A practical sequence matters more than a perfect scope. Uncertainty is the main reason buyers hesitate: Deloitte's 2026 M&A Trends Survey of US corporate and private equity leaders found uncertain market conditions rose 10 points to 29% as the greatest challenge to M&A and deal success. Sellers cannot remove market uncertainty, but they can remove company-specific uncertainty. That is the purpose of sell-side preparation, and it is the main reason CFO exit preparation should start well before the process does.

Our sequence has four stages. First, close the books: a firm month-end timetable, reconciliations current, no stale suspense balances, and audited or reviewed accounts available. Second, document the numbers: normalisation policy, working capital definition, debt-like list and change log. Third, test: have an independent reviewer try to break the earnings bridge. Fourth, commission: appoint the reporting firm with a scope that follows the issues found, not a generic template.

Not every seller should commission a report. Where the business is simple, the buyer universe is small, or a single strategic buyer has already shown interest, the cost and management time may not repay. Where several buyers will bid, where earnings contain judgement, or where an earlier process failed on numbers, a report is more likely to be worth it. This is a CFO decision supported by the board, taken with a view of the cost of a failed or repriced deal, not only the fee.

Finally, agree in advance what will make you pause the process. If the reconciliation of adjusted earnings to the ledger still leaves unexplained differences, if working capital cannot be stated on one definition, or if the reporting firm raises an issue the board has not seen, the right answer may be to delay launch by a quarter. Delay is uncomfortable, but a relaunch after a visible failure is more expensive, and buyers remember processes that were pulled or repriced.

What to do: within thirty days, agree the sale route and decision date, appoint the owner, and produce a one-page readiness score across earnings, working capital, net debt, cash conversion and forecast. Within ninety, close the gaps you can. At that point decide whether to commission. A CFO who arrives at the decision with evidence will spend less on the report and negotiate harder after it.

Karter McKinley supports M&A and corporate development processes, including sell-side readiness. We help CFOs build the normalisation policy, the financial change log and the readiness score, and we coordinate the accounting, legal and tax advisers who issue the report. We do not issue assurance opinions or regulated advice.