Clearing the Investment Committee: Why Institutional Capital Is Rejecting Unaudited Adjusts

In lower middle-market M&A and sponsor-backed recapitalizations, the gap between a headline Letter of Intent (LOI) valuation and final closing proceeds is almost entirely determined by the durability of Adjusted EBITDA. Across the 2026 transaction landscape, private equity investment committees and private credit underwriters have adopted a zero-tolerance posture toward loosely documented management add-backs.

Where Deals Break in Confirmatory Diligence

When a seller presents an Information Memorandum featuring 25% to 40% in “non-recurring” or “pro forma” EBITDA adjustments without invoice-level general ledger mapping, buy-side diligence teams quickly dismantle the bridge. Once an investment committee loses confidence in two or three headline add-backs, skepticism cascades across the entire financial model—leading to dollar-for-dollar multiple retrades or punitive earnout structures.

Fortifying Valuation Through Sell-Side QoE

• Voucher-Level Add-Back Substantiation: Every normalization adjustment—from executive compensation and litigation expenses to facility consolidation costs—must be indexed directly to underlying general ledger transactions and third-party invoices.
• Proof-of-Cash & Revenue Cut-Off Integrity: Reconcile bank-statement cash receipts and disbursements to reported accrual revenue and payables across the trailing 24 months to eliminate cut-off questions before the VDR opens.
• Defensible Net Working Capital (NWC) Pegs: Model seasonal working capital troughs and peaks early so the NWC target peg reflects true operational requirements rather than an arbitrary 12-month average that transfers cash to the buyer at close.