What was broken
A speciality manufacturer entered discussions with a private equity fund for a growth investment. The founders knew that PE diligence would be far more demanding than anything they had faced before, and their finance, tax, and compliance records were not organised to withstand that level of scrutiny.
What we did
CapEasy ran a pre-diligence readiness exercise: organising financial and tax records, closing compliance gaps, formalising related-party and governance documentation, and building the data room the fund’s advisors would examine. We flagged and remediated issues early so they would not surface as surprises during the fund’s review.
Where it landed
The company entered diligence with an organised data room and remediated records, allowing the process to move quickly and with fewer conditions. The preparation strengthened the founders’ negotiating position and investor confidence.
What an Australian PE firm actually opens first: the QoE file
Before a term sheet firms up, a PE fund’s advisors run a quality-of-earnings (QoE) review — a reconstruction of your last two to three years’ normalised EBITDA, independent of whatever figure appears on your management accounts. They are not checking whether you made money; they are checking whether the number you quoted them survives contact with the general ledger.
For a manufacturer, that means the QoE reviewer wants revenue recognition tied to despatch or completion (not to invoice date if the two diverge), inventory and work-in-progress reconciled to a physical count, and cost of goods sold that separates one-off tooling or setup spend from run-rate production cost. The gap between "our accountant’s P&L" and "a QoE-clean P&L" is exactly the gap CapEasy’s pre-diligence sprint exists to close — before the fund’s advisors find it for you.
Addbacks only survive if they are documented, not asserted
Founder-run manufacturers accumulate genuine addbacks — above-market owner salary, a one-off plant relocation, a family member’s below-market rent on the factory. A QoE reviewer will accept an addback that is evidenced with a signed lease, a market rent comparison, or a board minute; they will strike an addback that is just a founder’s assertion in a spreadsheet.
Related-party dealings carry an extra layer in Australia: under Chapter 2E of the Corporations Act 2001, a company giving a "financial benefit" to a related party — a director, a family member, an entity they control — needs member approval unless the transaction is on arm’s-length terms, is minor, or falls within another statutory exception (Corporations Act 2001, ss 207–230). A related-party lease or loan that was never formalised on those terms is not just an addback risk; it is a compliance gap the fund’s legal counsel will flag independently of the accountants. Formalising it — market-rate terms, paperwork, approval where required — is exactly the "related-party and governance documentation" work in this engagement, and it is the same fix either side of the fund raising the question.
Director and shareholder loan accounts are the other recurring addback fight. A company loan to a director or shareholder that is not on a complying written agreement is treated as a deemed unfranked dividend under Division 7A of the Income Tax Assessment Act 1936 — administered by the ATO — rather than as a genuine balance-sheet asset. A QoE reviewer who finds an undocumented director loan will either strike it from net assets or ask your registered tax agent to confirm its Division 7A treatment before it can be relied on. Neither outcome helps your position mid-negotiation.
Reporting obligations don’t pause because you’re mid-raise
A PE investment can push a proprietary company across the "large proprietary company" threshold under section 45A of the Corporations Act 2001 — turning on obligations to prepare audited financial statements and lodge them with ASIC that a small proprietary company does not carry. Whether the thresholds are already met, or the raise itself tips the company over them, is a question for your accountant and registered agent to confirm against the current figures — not one to discover after the round closes. Building that answer into the data room before the fund asks is part of the same pre-diligence discipline.
CapEasy prepares the reconciled records, the addback schedule with its supporting evidence, and the data room structure; everything is prepared for your registered BAS or tax agent to lodge, and any Division 7A or Chapter 2E position is a call for your tax agent, your lawyer, or the ATO.
What to take from it
- A PE fund’s QoE review rebuilds your EBITDA from the ledger independently of your management accounts — the two need to already agree before diligence starts.
- An addback survives only with evidence attached: a lease, a market-rate comparison, a board minute. An assertion in a spreadsheet gets struck.
- Undocumented related-party rent or loans are a Corporations Act compliance question (Chapter 2E) as much as an accounting one — formalise the paperwork, not just the number.
- An unformalised director loan risks Division 7A deemed-dividend treatment; get it onto a complying agreement before a QoE reviewer finds it first.
- Check whether the raise itself pushes you past the large proprietary company thresholds in section 45A — audited-report obligations are not optional once you cross them.