An Investment Committee Reads the Exit Before It Reads the Business
An investment committee has a narrower problem than most readers of a transaction document.
It isn't assessing whether a business is good, whether the sector is attractive, or whether the deal team worked hard.
It's deciding whether to commit capital that must be returned, with a return, within a period, through a sale to somebody who doesn't yet exist as a named party.
Everything is read in service of that question, and it runs backwards. What does this get sold for, to whom, on what basis, and what has to happen between now and then?
That explains what deal teams find counter-intuitive. A committee spends little time on a beautifully constructed market section and a great deal on two lines of the exit assumption, and will decline a business it likes because interest isn't the criterion.
And it focuses relentlessly on the difference between what management projects and what the deal team believes, because that difference is where the committee's judgement is actually exercised.
The committee is reading the deal team as well as the deal. The people presenting have spent months on it, have formed a view, and are, entirely honestly, subject to the commitment that comes from that work.
Committees know this and correct for it. A memo showing the team correcting for it themselves, by presenting the case against with the same rigour as the case for, is treated differently from one requiring the committee to supply the scepticism.
This article sets out how an IC memo is actually read: the order of the reading, the first three questions, where diligence findings have to appear, how an exit thesis is pressure-tested, the distinction between a management case and an IC case, and why "what would have to be true" is the framing that decides.
The committee is not asking whether you like the business. It is asking what it gets sold for, to whom, and what has to happen in between.
The IC Memo Is Read in an Order It Was Almost Certainly Not Written In
Deal teams write memos in the order the work was done: origination and process, company and market, management, financial performance, diligence findings, the plan, the model, valuation, exit, recommendation.
Committees read the summary, then price and structure, then the exit assumption, then the deviation between the management case and the deal team's case, and only then the supporting material.
By the time a committee member reaches the market section they've formed a provisional view and are reading to test it.
A summary reciting what the company does and how the opportunity arose has spent the most valuable space in the document on the least contested material.
A summary stating the price, the structure, the entry basis, the return, the exit assumption and the two or three things that would have to be true gives the committee its frame. A committee working from the team's frame is in a different conversation from one that built its own.
Valuation and exit deserve positioning accordingly. Placed near the end, they're reached by readers who have already decided what to worry about.
That isn't a presentational trick. The exit assumption is the load-bearing element of the entire case, and burying it behind forty pages communicates something about how central the team considers it.
The section read most sceptically, wherever it sits, is the value creation plan.
The recurring weakness is a plan of initiatives that are individually plausible and collectively unaccountable. Margin improvement, pricing optimisation, commercial excellence, operational efficiency, each with a number attached and none with a named owner, start date, cost, or mechanism for knowing six months later whether it happened.
A plan with three initiatives that can be tracked is worth more than one with nine that cannot.
| Pass | What is read | The question | What fails it | |
|---|---|---|---|---|
| 1 | The summary page | Price, structure, entry basis, the return the case produces, the exit assumed, the recommendation. | What am I being asked to approve, and on what does it depend? | A summary that describes the company instead of stating the proposition. The committee then builds its own frame. |
| 2 | Price and structure | Entry multiple, the earnings basis it is struck on, leverage, equity cheque, and what is in the bridge. | What are we paying, on what number, and how much of the return is structure rather than performance? | A multiple quoted on an earnings figure that has not been tested, or on a basis inconsistent with the exit assumption. |
| 3 | The exit assumption | Exit multiple, timing, and the identified classes of buyer with their basis of valuation. | Who buys this, why, and on what basis do they pay that? | Exit at or above entry with no argument for the re-rating. Multiple expansion assumed rather than earned. |
| 4 | The deviation between cases | Management case against the deal team's case, line by line, with the reason for each difference. | Where does the team disagree with management, and has it disagreed enough? | A deal team case identical to management's. Either no work was done or none of it changed anything. |
| 5 | The value creation plan | Initiatives, quantum, owner, timing, cost, and how progress would be observed. | Is this a plan or a list of aspirations with numbers attached? | Initiatives with no named owner and no mechanism by which failure would be visible in year one. |
| 6 | Diligence findings | What was found, what it is worth, and what has been done about it in price, structure or protection. | What did we learn that changed something? | Findings summarised as "no material issues". Something material is always found; the question is what it was worth. |
| 7 | Market, company and management | Sector dynamics, competitive position, and the team that will execute the plan. | Does this support the case already read, or contradict it? | A market section that cannot be reconciled to the growth assumption in the model. |
A generalised description of common practice among private equity funds, family offices and institutional investors. Committees differ, their processes are not published, and nothing here describes any named fund's internal procedure. The sequence is offered as the reading a memo should be built to survive.
Three Questions Arrive Almost Immediately, and They Are Always the Same Three
Whatever the sector and structure, the opening exchange reduces to three questions. An experienced team answers them in the memo before they're put, which is the difference between presenting a case and defending one.
The first is why this is available. A business is being sold by somebody who knows it better than the buyer does, and the reason for the sale is information.
A fund exiting at the end of its hold period, a founder retiring, a corporate divesting a unit that no longer fits, a family resolving succession: each is a benign and complete explanation.
What concerns a committee is the absence of an explanation, or one that doesn't survive the facts: a vendor selling at the bottom of a cycle, an asset marketed before and withdrawn. None is disqualifying, and each needs an answer or the committee supplies its own.
The second is what we're paying for that the seller hasn't already been paid for. An entry price capitalises the business as it is, so the return must come from improvement the current owner didn't make, growth they couldn't fund, a re-rating not yet earned, or deleveraging.
A case where the return comes mostly from paying a low multiple and selling at a higher one, with no argument for why the higher one is deserved, depends on the market rather than on the fund.
The third is what has to go right. Not what could go wrong, which a risk register answers weakly, but which specific things must occur, and how many there are.
A case requiring three things, each within the fund's influence, is a different proposition from one requiring seven, of which four depend on third parties. Committees count, and a memo that counted first has done the most useful work in the document.
A Diligence Finding Has to Land Somewhere, and "Noted" Is Not a Landing
Diligence produces findings, and the committee asks not what was found but what was done about it. The price moved, the structure changed, a protection was obtained, the plan was adjusted, or the finding was assessed and accepted.
A finding without one of those landings has been reported rather than addressed, and a committee reading a list of them concludes the diligence informed the memo without informing the deal.
The formulation attracting most scepticism is that no material issues were identified. Something material is found in essentially every process, because diligence is designed to surface variation.
A statement that nothing was found reads as indicating either that the work didn't reach far enough, or that the team calibrated materiality to the outcome it wanted.
The stronger position, even where findings were genuinely modest, is to state what was found, what it was worth, and why it didn't change the price. That's an assessment, and an assessment can be evaluated.
The earnings work sits directly beneath the entry price. Where a quality-of-earnings review has moved the sustainable figure, the committee needs the entry multiple restated on the tested figure rather than the presented one.
A multiple quoted on the vendor's adjusted EBITDA, with diligence findings described separately, has presented two facts the reader must combine. The reader will combine them, arriving at a higher effective multiple than the memo stated.
Working capital and net debt findings need the same discipline, since a finding affecting cash to seller affects the fund's entry. The most useful presentation is a short table: what was found, what it's worth, and where it was dealt with.
A case, before and after the findings are landed
A deal team proposes acquiring a business at 9.0x the adjusted EBITDA of 12.0 presented by the vendor, an enterprise value of 108. Diligence has been completed and the findings are summarised in the memo as "no matters identified that would alter the investment case". Below is the same transaction with each finding landed. All figures are illustrative only.
- As presented Entry at 9.0x on adjusted EBITDA of 12.0 — EV 108
The memo states the entry multiple against the vendor's adjusted figure. The diligence section, four pages later, notes three findings without quantifying any of them. Both statements are accurate; together they are misleading, and the committee will combine them.
- Landed Earnings: two add-backs not sustainable — EBITDA 11.1
A rebrand presented as one-time recurs on a cycle, and a run-rate saving was annualised without the three roles that were subsequently refilled. Tested sustainable EBITDA is 11.1, not 12.0. At the same 108 enterprise value the effective entry multiple is 9.7x, not 9.0x — which is the number the memo should state.
- Landed Bridge: deferred consideration is debt-like — equity +3.5
An earn-out payable to the founders on prior-year performance is an obligation of the business at completion. Treated as debt-like, it increases the deduction from enterprise value and the cash the fund must find. It does not change the multiple; it changes the equity cheque, and therefore the return.
- Landed Working capital: peg understated — equity +2.0
The reference period used to set the peg covers months in which collections were unusually strong. Normalised across a full cycle the requirement is 2.0 higher, which is either conceded in the peg or funded by the buyer after completion. Landed in the price discussion, not in a schedule.
- Landed Customer concentration: protection rather than price
The two largest customers are 41% of revenue and both contracts contain change-of-control provisions. This was not resolved by price. It was resolved by making consent from both a condition to completion, which is a landing — the finding has a consequence a committee can see.
- Result What the memo should have said in its first line
Entry at 9.7x tested sustainable EBITDA of 11.1, with 5.5 of additional equity arising from the bridge and the peg, and completion conditional on two customer consents. That is the proposition. It may still be an excellent investment — but it is a different one from 9.0x, and the committee is entitled to assess the one that is actually being proposed.
Nothing here required the deal to be abandoned and nothing required a reduction in price; the fund may well conclude that 9.7x for this business is attractive. What changed is that the committee is now assessing the transaction as it exists rather than as it was first framed. The alternative — a committee that derives 9.7x for itself, from a memo that said 9.0x — spends the rest of the meeting testing the deal team rather than the deal, and that is a far more expensive outcome than a lower headline.
The Exit Multiple Is Not an Assumption; It Is a Claim About Who Buys and Why
Most of the return in most private equity cases is realised at exit, which makes the exit assumption the most load-bearing element in the memo. It's routinely the least supported.
An exit multiple stated as a number, benchmarked against a range of sector transactions, has asserted that the market will be there.
A committee wants the argument beneath it. Which classes of buyer would acquire this business at that point, what each would be buying it for, and on what basis each would value it.
Different buyers value differently. A strategic acquirer buys a position or capability and may pay a multiple no financial buyer would justify, but only if the business is genuinely strategic to somebody identifiable. A financial buyer underwrites their own return from what the fund leaves behind.
The test exposing a weak exit thesis is asking what the next owner buys. Where the plan extracts the available improvement, the business handed to a successor has less left in it.
A case requiring the fund to capture all the improvement while simultaneously requiring the next buyer to pay for improvement is internally inconsistent, and it's a common inconsistency.
Multiple expansion is an exceptional claim. Assuming exit above entry assumes the business is worth more per unit of earnings than today, which requires a reason: greater scale, better earnings quality, reduced concentration, a shift to recurring revenue.
Where no reason exists, the honest assumption is exit at entry or below, and a case that works on that basis is materially stronger than one requiring the market to be kind.
Timing carries more of the return than deal teams typically present. An exit later than assumed compounds against the return even where every operational assumption is delivered in full.
A plan that extracts every available improvement and an exit that requires the next buyer to pay for improvement cannot both be true. One of them has to give.
The Committee Reads the Gap Between the Two Cases, Not Either Case Alone
A memo commonly carries two projections: the management case, prepared by the people running the business, and the case the deal team is actually underwriting.
Committees read both, and what they read most carefully is the difference, line by line, with the reason for each divergence.
That difference is the clearest available evidence of what the deal team learned and how much of it they were willing to act on.
The pathological outcome is a deal team case matching management's. Either diligence found nothing that changed the view, which is implausible, or the team found things and didn't reflect them because doing so would have made the transaction harder to justify.
A committee can't distinguish these from the document, and will treat the identity of the two cases as the finding.
Equally telling is a uniform haircut across every growth rate. That isn't analysis; it's a gesture toward conservatism revealing no view about which assumptions are wrong.
It also produces an internally incoherent case, since the reasons an assumption is optimistic differ line by line. A pipeline may be overstated because it double-counts opportunities, a margin because a cost was omitted, a growth rate because it assumes a competitor doesn't respond.
The most useful presentation is a reconciliation: management's revenue, then each adjustment with its reason and supporting evidence, arriving at the underwritten figure. The same for margin and capital expenditure.
Presented that way, a committee can assess each judgement separately, agree with some and disagree with others, and form a view about the whole without reconstructing the analysis.
One further distinction: the case underwritten isn't the case incentivised. Management is incentivised against a plan more ambitious than what the fund underwrites, and where the memo doesn't separate them the committee can't tell which number the fund relies on.
| What the memo shows | How it is read | The underlying concern | What to present instead | |
|---|---|---|---|---|
| 1 | The two cases are identical | Either the diligence changed nothing, or it changed something that was not reflected. | The team has adopted management's view of the business it is buying from management. | A reconciliation showing each adjustment and its evidence, even where the net effect is small. |
| 2 | A uniform haircut across every line | A gesture toward conservatism that expresses no view about any specific assumption. | The team has no line-level view, so the case cannot be assessed line by line. | Specific adjustments with specific reasons; the reasons differ by line and should show it. |
| 3 | One case only, unlabelled | The committee cannot tell what is being underwritten as against what is being incentivised. | Approval would be given without knowing which number the fund is relying on. | Both cases, separately labelled, with the reconciliation between them. |
| 4 | Deviation on revenue but not on cost | Growth was challenged; the cost base required to deliver it was not. | A reduced revenue case carrying an unreduced margin is usually arithmetically generous. | Adjust both, and show the cost consequences of the revenue adjustment explicitly. |
| 5 | Line-level reconciliation with evidence | Each judgement can be assessed, agreed with or disagreed with, separately. | None — this is the presentation that allows the committee to do its work. | Retain it. It also serves the later review of the investment against what was underwritten. |
A generalised description of common practice. Committees, funds and their processes differ and are not published; nothing here describes any named institution's internal procedure, and no pattern listed carries any outcome on its own.
"What Would Have to Be True" Is the Question That Actually Decides
The most useful framing available to anyone preparing an IC memo inverts the usual one.
Instead of asking whether the case is right, which invites advocacy on one side and scepticism on the other and resolves nothing, ask what would have to be true for it to be right.
List those things, then assess each on its own.
The question isn't rhetorical. It produces a short list of propositions, each of which can be evidenced, tested, or acknowledged as unknowable.
It converts a debate about a conclusion into an examination of its components.
Its power is that it neutralises the dynamic that otherwise dominates the room.
A committee confronted with an advocated case adopts the opposing position by default, and the discussion becomes a contest in which the deal team defends and the committee attacks.
That surfaces objections in an order determined by who thinks of what, and frequently ends without either side knowing whether the important questions were reached.
A committee handed a list of five propositions the case depends on has a structured agenda. It can accept three, question one and reject one, and the resulting decision is about the case rather than the presentation.
The exercise is genuinely uncomfortable to perform honestly, which is why it's valuable.
It requires the deal team to identify the propositions they're least sure of, and say so, at the moment they're asking for approval.
But a team that names its own weakest link is treated very differently from one whose weakest link is found. The first has demonstrated judgement; the second has demonstrated that its judgement needs supervision.
A worked framing, for a case that depends on organic growth, margin improvement and an exit to a strategic buyer. Five propositions, each stated so it can be assessed separately — which is the whole of the technique.
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The market grows at the assumed rate, and this business holds its share
Two propositions, and they should be separated. Market growth is evidenced externally; share retention is a claim about competitive position and is the one that usually needs the work. A case that evidences the first and asserts the second has answered the easier half.
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The margin improvement is available and has not already been taken
If the current owner could have taken it, the question is why they did not — and the answer must be something the fund can change: capital they lacked, expertise they did not have, or an incentive they did not face. "They were not focused on it" is not an answer a committee accepts twice.
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The management team can execute this specific plan
Not whether they are capable in general, but whether they have done this particular thing before. A team that has grown a business organically is not thereby a team that can integrate acquisitions, and the plan should say which capability it requires and where that comes from.
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A strategic buyer exists at exit and this asset is strategic to them
Requires named classes of acquirer, a reason each would want this business, and a scale test — an asset too small to matter to the obvious buyer is not strategic to them however good the fit. If this proposition fails, the exit is to a financial buyer at a different multiple.
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Something identifiable remains for the next owner
The proposition most often missing entirely. If the plan extracts all the available improvement, the next owner is underwriting a return from a business with none left — and the exit multiple assumed will not be paid. Naming what remains is the test of whether the exit thesis is coherent.
The IC Memo Is an Instrument for Deciding, Not a Case for Approving
The reorientation is the same one that governs a board paper, arriving from the investment side.
A memo written to secure approval is read as advocacy and discounted accordingly.
A memo written to enable a decision, setting out what is being bought, what the return depends on, what diligence found and where each finding landed, what the exit thesis claims and who would make it true, is read as analysis.
The second gets approved more often, which is the practical argument. It also produces better decisions, which is the real one.
The test applies to any draft.
Could a committee member who has read only this memo state what the fund is underwriting, what has to happen, how many things have to happen, who is expected to buy at exit and why, and what the team is least confident about?
If yes, the memo has done its work and the meeting is about substance.
If no, the committee will construct its own frame, and the discussion will be about the gaps rather than the decision.
None of this requires more length or more caution. It requires deciding, before drafting, whether the document is an argument or an instrument.
How this work is carried out
Projectzo has prepared investment papers, valuations and diligence documentation for funds, their portfolio companies and institutional investors since 2010, across 22 countries. Each mandate is assigned a single senior advisor, from scoping through final delivery, and is challenged by a second senior reviewer before release, on the assumption that an investment committee will look for the weakest claim first.
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