Private Equity Portfolio Companies

Purchase accounting allocates consideration to acquired assets and liabilities at fair value: customer relationships, trade names, developed technology, favorable and unfavorable contracts, with goodwill as the residual and deferred taxes on every book-tax basis difference created. Pushdown is an election, made once when control changes, and it is irrevocable for that event: electing it aligns the company’s books with lender and sponsor reporting and avoids maintaining two bases, at the cost of resetting equity and loading amortization into standalone earnings. Most sponsor deals elect it; the memo should say why, and the opening balance sheet, useful lives, and intangible valuations need audit-ready support because the first-year audit tests all of it. Transaction costs are expensed, not capitalized into the deal.

What we do: We support the opening balance sheet, coordinate the intangible valuations, and map the deferred taxes, so the first-year audit tests a documented position.

Each add-on gets its own allocation, with the measurement period capped at one year from close: adjustments during that window for facts existing at the acquisition date update goodwill, with current-period recognition of any earnings effect; anything later is an error, not an adjustment. Working capital true-ups against the peg settle through consideration. Earnouts are contingent consideration at fair value at close, remeasured through earnings each period until settled, which surprises operating teams the first time an improving forecast creates expense. Standardize the playbook across add-ons: consistent intangible categories, life conventions, and a one-binder support package per deal, so the year-end audit tests a process rather than five bespoke transactions.

What we do: We standardize the purchase accounting playbook across add-ons and deliver a one-binder support package per deal, so the audit tests a process, not five one-off transactions.

Debt issuance costs and OID are presented as a direct deduction from the debt balance and amortized to interest expense under the effective interest method (revolver costs may sit as an asset). PIK interest accrues at the effective rate and capitalizes into principal. For amendments, run the 10% cash flow test lender by lender: a change of 10% or more in present value of cash flows is an extinguishment, writing off unamortized costs and recognizing gain or loss; under 10% is a modification, with third-party fees expensed and lender fees rolled into the yield. Term loan repricings, maturity extensions, and recap dividends each rerun the test. Keep a debt workpaper that carries the effective rates and unamortized balances by tranche, because five years of amendments is unreconstructable from memory at exit.

What we do: We run the modification-versus-extinguishment test at each amendment and maintain the tranche-level debt workpaper, so five years of amendments are still reconcilable at exit.

Profits interests granted for services are share-based compensation under ASC 718, measured at grant-date fair value, which requires a valuation reflecting the waterfall (option pricing or Monte Carlo, not the face of the unit). Time-vested units expense over service. Exit-contingent vesting is a performance condition: no expense until the exit is probable, which for a sale process generally means recognition at the liquidity event, a large charge that belongs in the deal model, not a closing surprise. MOIC and IRR hurdles tied to sponsor returns are performance conditions too; pure share-price hurdles would be market conditions built into fair value. Rollover equity exchanged by management in the deal is generally purchase consideration rather than compensation, unless vesting or clawback terms tie it to future service, in which case the service-linked portion is compensation. Paper the analysis at grant.

What we do: We write the ASC 718 position at grant and model the exit-vesting charge, so it is a known number in the deal model instead of a diligence finding.

Maintain a standing GAAP-to-covenant-EBITDA bridge that starts at reported net income and walks each defined addback with support: the credit agreement clause, the calculation, and the evidence. Recompute covenant ratios each reporting period on the agreement’s definitions, not the board deck’s, and reconcile any management-adjusted EBITDA used internally to both. Where covenant terms reference frozen GAAP, track new standards (leases did this to a generation of agreements) and apply the agreement’s override. The same bridge becomes the first exhibit in sell-side diligence, so building it quarterly is exit prep on an installment plan.

What we do: We build and maintain the GAAP-to-covenant-EBITDA bridge every quarter, which is also the first exhibit a buyer asks for.

Twelve to eighteen months before a process, run the sell-side sequence: audit uplift where financials are unaudited or the opinion needs upgrading, a pre-emptive quality of earnings that lands the adjusted EBITDA story on your terms, working capital and net debt definitions drafted before the buyer drafts them, and remediation of the known soft spots (revenue cutoffs, add-on integration entries, related-party arrangements, incentive equity expense). Carve-outs need standalone financials with allocation methodologies that survive scrutiny. The economics are simple: diligence findings reprice at the deal multiple, so a finding avoided is worth many times the cost of finding it yourself.

What we do: We run the audit uplift and the pre-emptive quality of earnings twelve to eighteen months out, so you find the issues before the buyer does.