Multimedia | Advisor's Edge, episode 1
Laying the financial groundwork for PE acquisition
May 20, 2025 · Authored by Christopher Annand, Martin Nikolov
Baker Tilly and CFO Dive bring you this podcast series designed for companies evaluating private equity opportunities.
Is your company considering a private equity (PE) acquisition? Preparation is critical — and the Advisor’s Edge podcast is here to help. This limited, three-part series from Baker Tilly advisors guides business leaders and finance professionals through key steps in the PE acquisition process.
In this episode, Chris Annand and Martin Nikolov discuss the crucial role of financial planning and due diligence in preparing companies for acquisition by private equity firms. These processes ensure both parties are ready for a successful relationship and future prosperity.
Other episodes in this series
How outsourced accounting creates excellence in PE portfolios
This episode discusses the benefits of outsourced accounting for PE firms and their portfolio companies.
How effective financial reporting builds a platform for PE acquisition success
This episode discusses the importance of effective financial reporting for portfolio companies preparing for a PE transaction.
This episode's advisors
Martin Nikolov
Martin Nikolov is a managing director in our New York office and advises business, owners and investors on merger and acquisition (M&A) transactions.
Christopher Annand
Chris is a principal with Baker Tilly’s CFO advisory practice and leads complex financial advisory engagements for the firm.
Danny Bradbury:
Welcome to our podcast series Advisors’ Edge with Baker Tilly. We'll be talking about the skill that it takes to prepare portfolio companies for acquisition by private equity firms. Today we'll be talking about financial planning and advisory services, or FP&A. And this along with due diligence is a pivotal process in PE acquisitions because it shines a light on the health of a portfolio company and ensures that both participants fully understand the financial parameters of the deal. When done thoroughly with deep financial knowledge, this will fill any gaps in the portfolio's reporting and ensure that there are no surprises on either side. So joining us today, are Martin Nikolov, managing director at Baker Tilly, along with Chris Annand, principal at the company. Martin, could you begin by telling us a bit about yourself?
Martin Nikolov:
Yeah, absolutely. Thanks for having us, Danny. My name is Martin Nikolov. I'm a managing director in the New York office in our transaction and financial advisory practice specializing in due diligence, so M&A transactions. I work with both buy sides as well as sell sides. Engagements for clients that are primarily focused on the middle market, and that includes both strategic buyers as well as financial sponsors.
Danny Bradbury:
Pleased to have you here, Martin. Thanks for joining us. And Chris, maybe tell us a bit about yourself for the audience.
Chris Annand:
Yeah, thanks, Danny. My name is Chris Anand, and I'm a principal here in Baker Tilly's, CFO advisory practice, hailing from our Boston, Massachusetts market. I'm a CFA charter holder, and I have quite a bit of a comprehensive background in corporate finance, having spent, geez, perhaps the past 15 years, really providing financial planning and analysis services to our client base, including experience with mergers and acquisitions and business valuation and capital structure and other consulting services across a wide variety of industries. And I'm pleased to be here today to talk to you about the financial planning and analysis service offering as it relates to selling the business within a private equity environment.
Danny Bradbury:
Excellent. Well I am pleased to have you here. So it's going to be a good podcast today. And I want to start there maybe with, with the basics. So let's start with financial planning and advisory. Chris,can you describe why we need this during the pre-transaction period and what's involved in FP&A?
Chris Annand:
Yeah, absolutely, Danny, thank you. I'd say that really financial planning and analysis is incredibly critical during the pre-transaction period, and I like to say that it almost always lays the foundation for a successful sale. When you think about FP&A from a sell side perspective, it really begins well before a business owner formally decides to sell their business. In many cases, owners are using FP&A to actually develop and analyze their thesis for selling the company in the first place. It's at that stage where our relationship will typically begin with the business owner to assist with analyzing the cost benefits of selling the business now or waiting to sell it in the future. And so we'll typically work closely with the client to analyze the business's financial performance and identify key trends and growth opportunities, and start to introduce those forward looking models and projections to inform their decision making.
We're really trying to help business owners at this stage answer critical questions such as is now the right time to sell? And if I do, what do I stand to benefit financially? If I don't, what growth opportunities still exist for my business and what upside might I gain if I hold on? What areas of the business present risks to my success? What areas of the business need fine tuning before I go to market? And so these are the things we're trying to help business owners answer well in advance of actually testing the market in the first place. But once the seller decides to test the market, I'd say FP&A really takes on an even more pivotal role. Our focus will tend to shift to refining and presenting the business's financial story in a way that aligns with the expectations of private equity buyers.
We're really looking to work closely with the seller to create a comprehensive financial package that includes performance projections, and a well-structured financial model that clearly demonstrates the company's growth potential and scalability. This process not only helps the seller justify their asking price, but also makes the business more attractive to buyers. We can address perceived risks, we can also highlight opportunities for continued growth. Ultimately, we're trying to ensure the company's positioned for a smooth, successful transaction. Now, that's all on the sell side, but I'd say from the buy side's perspective, FP&A is equally critical. Private equity firms will be conducting their own analysis of the company's financials and performance, and they're often reviewing the same data and forecasts and projections that we've helped the sell side prepare. And so our work on the sell side becomes crucial in ensuring alignment with the buyer's expectations. They'll want to assess growth potential and scalability in the overall financial health of the business before committing to a deal. And our work will help sellers not only present as an attractive target, but also align with what the buyers are looking for.
Danny Bradbury:
So it's really an exploratory process, but then once you've decided that you want to commit then, then it's about making the company presentable and ensuring that it can do what it says it's going to do, or what it thinks it's going to do when it actually gets acquired. It's really interesting. Can you very briefly outline what might make a company decide not to go forward with an acquisition during this consulting phase?
Chris Annand:
It may be that they see a sale on the horizon, but they don't know if now is the exact time to test the market. They want to get the gains of selling the business and see that influence their personal wealth, but perhaps they're leaving some growth opportunity on the table, and if they hold onto the business and really lean into that growth opportunity to expand the business they could potentially sell at a higher valuation in the future. And so it's that type of analysis that's critical to their decision-making. We call that in the industry, performing really a hold versus sell feasibility analysis. And we can look at if you do sell now, what might that mean for a potential valuation of the business and what might that mean in terms of after tax dollars that you put into your pocket as the business owner? But then there's the flip side, well, if you hold and you think there's growth opportunity, there may be even more to gain in the future. And so that, that type of analysis can be critical to informed decision-making around not just if, but when.
Danny Bradbury:
As I understand it, due diligence is a separate but complimentary process during this phase. Martin, can you talk about what this process covers, and how it compliments FP&A?
Martin Nikolov:
Yeah, absolutely. I can kind of provide more color on that. So we typically, from a diligence standpoint get involved much closer to when a transaction is about to happen. As kind of Chris mentioned, we can be either be involved on the buy side or on the sell side in these processes. But essentially what the diligence process, what entails is working with management, especially on the sales side to document the finance and accounting function of the business, the accounting policies, the consistency of the accounting policies during the historical period, work with management to identify non-operating or non-recurring transactions that been reported during the historical period, and essentially work with management to present a normalized view of the earnings of the business to potential buyers. Some of these processes tend to be quite involved in intense with multiple parties involved. We kind of like to think about the sales side diligence as a friendly setting that essentially helps management prepare begins for this intense process.
Danny Bradbury:
So you've got these third party stakeholders, Martin, that want to, I imagine, have their own questions answered. It could be on the buy side, it could be the investors for the company. What kinds of questions do you find yourself having to answer from others outside of kind of the internal friendly process that you're going through with the seller?
Martin Nikolov:
Typically it's the questions around the financial performance of the business during that historical period that potential investors is looking at that they kind of essentially want to understand how does that link to, you know, some of the work that Chris talked about around the forecast and the projections. And it's also the questions around, from an accounting standpoint, the, you know, rationale behind the accounting policies, understanding what's the difference between the cash versus the accounting impact of transactions on the business as well as any kind of deviations from GAP.
Danny Bradbury:
I understand that a lot of these businesses come from fairly basic accounting backgrounds. In many cases, there may be mom and pop shops that haven't really had an expert accountant throughout their whole life cycle. So if someone's been using, say, cash accounting or something very simple to keep track of their books, how much more difficult does that make the due diligence? And what do you have to do to adjust your own processes to ensure that you get a proper due diligence picture on the sell side?
Martin Nikolov:
You're absolutely right, a lot of businesses that we work with in the middle markets, smaller businesses, the focus historically has not been on the accounting function. So the transactions for most part are being counted on a cash basis. It's essentially not going through the process of essentially quantifying what the differences between cash basis and accrual basis could have a significant impact on the valuation of the business and can erode value later on in the process.
Danny Bradbury:
Interesting. Okay. So that's you know, one challenge I guess is trying to understand the accounting that's happened before, but I imagine that neither of these FP&A or due diligence come without other challenges. So maybe we'll start with you, Chris. Can you talk a bit about the kinds of hidden challenges that sell side clients don't always anticipate when conducting FP&A during the first phases of this PE relationship?
Chris Annand:
I think if we're focusing on the sell side, one of the biggest challenges really, it's really the difficulty in creating accurate and realistic forward-looking projections. Business owners are often very familiar with their current operations, but when asked to project future performance what I've seen is they can tend to be sometimes too optimistic or maybe underestimate the complexities of growth. And so forecasting the business on a prospective basis may not be that simple, especially when you don't have the right tools or the right historical data to back up their assumptions. Sellers may not always have the systems in place to generate reliable, detailed projections, and if not, this can raise questions for potential buyers and perhaps even negatively impact the perceived value of the business.
As an example, if the seller originally projected a certain level of revenue or let's say profitability, but fails to meet those targets as the due diligence process unfolds, well then the buyer might argue that the business is not as financially healthy as expected, and that could lead to a lower valuation or restructured deal, or perhaps even jeopardize the deal entirely. It's important to put, you know, projections in place that are solid and credible and really try to avoid the unnecessary friction in the transaction process that could come about and potentially derail the sale.
Danny Bradbury:
So it's a bit of a tangled path potentially for FP&A. On the due diligence side, Martin, what other challenges do you find surfacing as you begin to dig into a seller’s books?
Martin Nikolov:
I think a lot of what Chris mentioned, we also see it kind of on the diligence side, the disconnect between the historical performance in the business and how that links to the story that's being told to the market and/or to a prospective investor or a buyer. I guess maybe couple of additional points that, usually come up on the sales side, I think a lot of times, sellers, they have their own view of what adjustments to normalize the earnings of the business should look like. And a lot of times those could be either too aggressive or they could be out of market. The benefit of us from Baker Tilly that we kind of do these kind of engagements both on the buy side and on the sell side, we can kind of switch the lens through which we look at these adjustments and help explain how potential investors think about those adjustments so that there's no misalignment between value between buyer and seller.
Danny Bradbury:
It sounds like you need a fairly broad skillset to do some of this work. So could you talk about how working with a professional team like Baker Tilly can help here? What qualities Chris, does third party professional help and Baker Tilly in particular bring to help overcome the challenges we've been talking about?
Chris Annand:
I think there's several key advantages to working with a professional team like ours at Baker Tilly that can really help you navigate the challenges that you might face during the pre-transaction phase. For one, I mean, one of the primary qualities we bring to the table is really our expertise. Our team has deep experience in providing these types of services and really helping clients prepare for transactions. From anFP&A perspective, I can say that we certainly understand the intricacies of forecasting and modeling and analyzing a business's financial performance in a way that helps us articulate to business owners what they stand to gain personally from the sale of their business. And we also know what really resonates with potential buyers, especially private equity firms. Another key strength I'd say our ability to be objective as third party professionals. We bring an unbiased perspective to the table, and a lot of times business owners often have an emotional attachment to their company and that could perhaps cloud their judgment when they're developing projections or entering into a sale process.
We can really help them take a step back and kind of take a more, I'd say, a more realistic or data-driven approach to targeting the market. We also bring valuable tools and information to the table. Many businesses just don't have the internal systems or the processes or the tools in place to create reliable or detailed financial projections, and we have those templates and can bring to the table the modeling techniques needed to create sound dynamic forward looking financial models that are grounded in data and aligned with the industry best practices. And the last thing I'd say, we can also help really bridge the gap between the seller and the buyer. We're experienced in communicating complex financial concepts that are clear and understandable, and we work closely with business owners to refine their financial story and ensure that what they're projecting is aligned with the expectations of potential private equity firms. Ultimately working with a professional team like ours helps mitigate risks and ensures that the seller enters the transaction process with the best possible financial package, which hopefully increases the likelihood of a smooth, successful sale.
Danny Bradbury:
Martin, could you talk about the worst case scenarios for companies who get this critical set of pre-transaction tasks wrong. Whether it's FPI or due diligence or if failing to meet due diligence if they don't prepare themselves properly and get through some of these tests, then what's the worst that can happen? What can go wrong?
Martin Nikolov:
I think Chris touched on it previously, right? I think it's essentially last minute surprises, issues that either delay the process cause a retrade essentially the value that was initially thought of going into the process is not able to be achieved, a delay of the process, and ultimately the deal not going through, right? Those will be some of the worst case scenarios that we can think of. But I think as Chris mentioned, right, having the right team by your side as you go through this process and having this honest dialogue and communication around issues and setting the expectations communicating clearly the challenges or the disconnect between somebody who might be biased versus a third party objective professional service provider. Those are the things that protect against those worst case scenarios.
Danny Bradbury:
And Chris, maybe you could talk about the opposite side of the equation here. What have you seen go really well? What's the best possible outcome for a company that nails everything, hits every mark? Are there any kind of stretch goals here that, they can reach that enable 'em to get 110% in terms of success?
Chris Annand:
Yeah, I mean, when these tasks are done right, the best possible outcome is it's really a smooth, successful transaction. Success looks like the company entering the market with a strong financial story that's backed by credible, realistic projections and a clear path to growth. And it also means the seller is able to justify their asking price. They're able to address potential risks and highlight areas of opportunity to buyers in advance. And that not only leads to a higher likelihood of closing the deal at a favorable price, but it can also foster a positive relationship with the buyer and really set the stage for a successful partnership post acquisition. And it's important to really understand that at the end of the day there's a transaction and you're forming a partnership that's going to persist post-acquisition.In that best case scenario, it's really where the seller and the buyer walk away from the deal feeling confident and optimistic about the future with the seller achieving their financial goals and the buyer gaining a solid, scalable business to grow together thereafter.
Danny Bradbury:
I guess it sets the basis for a fruitful long-term relationship, right? It builds a solid platform. That’s good to hear. Maybe we can finish up by talking about some of the best practices then that portfolio companies can follow. What can they bring to the table to set themselves up for success when working with a professional services company on FP&A and due diligence? And Martin, I'm going to throw that one out to you.
Martin Nikolov:
Sure. I think best practices getting a third party professional accountant involved early on in the process to work with them through key objectives for the engagement. Just to kind of understand the expectations of going through this transaction so that we can identify the areas where they need help be it accounting, FP&A, tax, IT, diligence, and in other areas. And also, I think it’s as companies are going through these process to essentially ask questions there are a lot of moving parts in these kind of processes and making sure that they ask their partner their professional service forums, the areas where they can provide value.
Danny Bradbury:
Excellent. And Chris, what about you? What would you say are the best practices here that people can follow to ensure a positive outcome?
Chris Annand:
I certainly agree with Martin. I think ongoing, proactive communication with an advisory team at a professional services firm is paramount. It really is. But in terms of things that sellers can do on a proactive basis I would say that best practices really revolve around ensuring data, I'll call it data integrity, and just being proactive in their planning process. On data integrity it's essential to have reliable and up-to-date financial data, and that includes having clear and accurate financial statements and forecasts and really having a grasp of their key performance indicators. And these should be really routinely tracked well ahead of entering a sale process. If you don't have that foundational data, it becomes really difficult for the advisory team to work with the client to create things like reliable projections and build out financial models needed to support the sale process.
Companies should really take a forward looking approach by identifying and refining their KPIs as mentioned earlier. And it's also important to understand not just the current financial performance, but also the growth potential of the business, and really what external factors may impact future performance, good or bad, and really understand those well ahead of time so that you can have a clear, well thought out set of assumptions to developing projections and so-called pitching their story to the market. But full circle, again, I think one of the best things that business owners can do is just really open up the lines of communication with the advisory teams. Be transparent with strategic shifts or any sort of operational changes that they might be considering, or growth opportunities that might be available to the business so that the advisory team can advise on how to add value to their business and really showcase it to the market.
Danny Bradbury:
Excellent. Thank you very much. Well, thank you Martin Nikolov and Chris Annand for joining us today. Your insights have been invaluable, and thank you for listening to our discussion of how FP&A and due diligence are essential when laying the proper financial groundwork in private equity acquisitions. So join me next time where Baker Tilly's, Suzanne Bain, and Royce Prude will discuss how effective financial reporting prepares new portfolio companies and their private equity partners for ongoing success. Thanks very much, gentlemen.
