A recent EY survey found that 65% of PE firms struggle to reflect value creation in exit EBITDA. When asked why, 41% cited insufficient data granularity. Not bad deals. Not weak management. Insufficient data granularity.
That number should keep operating partners up at night. It means that PE firms are creating real operational value during the hold period and then failing to prove it at exit because the data does not tell the story clearly enough.
Data governance is the discipline that solves this. But most operating partners treat governance as a compliance checkbox or an IT project. They delegate it, defer it, or dismiss it until exit preparation forces the conversation.
Three specific mistakes explain why governance fails at most portfolio companies. Each one is common. Each one is fixable. And each one directly affects the multiple you get when you sell.
Mistake 1. Delegating governance to IT
The most common governance failure starts with a well-intentioned decision. The operating partner recognizes that data needs attention. They tell the CEO. The CEO tells the CTO or IT director. IT scopes a project around data quality tools, access controls, and system upgrades. A budget gets approved. Work begins.
Six months later, the tools are implemented. Access controls are tighter. A few dashboards got built. And nobody in the business uses any of it.
This happens because IT solved a technology problem when the actual problem was operational. Governance is not about tools or access policies. It is about ensuring that the numbers the business produces are consistent, defensible, and aligned with how value will be measured at exit.
IT does not own the definition of revenue. IT does not decide whether retention should be measured by logo or by dollar. IT does not determine which EBITDA adjustments are supportable and which ones will be challenged by a QoE team. These are business decisions that require business ownership.
What actually happens when IT owns governance. A $75M healthcare services company I assessed had implemented a data governance “program” led by their IT department. They deployed a data catalog tool, created access policies, and documented their system architecture. All useful work.
But when I asked the CFO to define their customer retention rate, she gave me one number. The VP of Sales gave me a different number. The investor deck used a third number. The IT-led governance program had cataloged the systems but had not resolved the definitional conflicts that mattered for the business.
During their exit preparation, the QoE team flagged the retention inconsistency. The buyer’s investment committee asked which number was real. The answer, “all three are technically correct,” did not inspire confidence. The discussion cost them two weeks of diligence time and introduced uncertainty that contributed to a lower bid.
The fix. The CFO or COO owns data governance. IT supports the implementation. The operating partner holds the CFO accountable for data governance outcomes the same way they hold the CFO accountable for financial close quality.
Governance decisions (metric definitions, reconciliation standards, documentation requirements) are made in the operating review, not the IT planning session. IT builds what the business defines. That is the correct order of operations.
Mistake 2. Starting governance at year three
The second mistake is timing. Most portfolio companies do not think about data governance until the exit process is already in motion. Year one is about operational stabilization. Year two is about growth initiatives. Year three is about exit preparation. Governance shows up in year three, when there is not enough time to do it properly.
By year three, the data problems are entrenched. Three years of inconsistent definitions, undocumented processes, and manual workarounds have created a layer of technical debt that cannot be unwound in six months.
I watched a $120M manufacturing company try to implement governance in the twelve months before their exit. They needed to reconcile revenue across three ERP systems from two acquisitions, standardize customer definitions across the legacy company and the acquired entities, and document their cost allocation methodology for the first time.
The work took eleven months. They hit their exit timeline, but barely. The data was defensible, not clean. The diligence team accepted it with reservations. The deal closed, but the management team was exhausted and the buyer negotiated harder than they should have needed to because confidence in the data was moderate, not high.
If that same work had started in the first 100 days after acquisition, it would have been straightforward. The systems were fresh. The team was open to change. The time pressure did not exist. Instead, they spent eleven months doing work that would have taken four months if started earlier.
Why operating partners delay. Three reasons.
First, governance does not feel urgent. In year one, there are fires to fight. Revenue targets to hit. Management changes to make. Governance feels like something you can get to later.
Second, governance does not have an obvious ROI until exit. The returns from governance (faster reporting, cleaner diligence, higher buyer confidence) are realized at exit, not during the hold. Operating partners focused on near-term value creation defer the work that pays off at the end.
Third, governance sounds boring. It is not a growth initiative. It does not have a compelling narrative for the quarterly review. “We documented our KPI definitions and built a reconciliation process” does not compete with “we launched in two new markets and grew revenue 18%.”
The fix. Start governance in the first 100 days. Not as a separate initiative. As part of the standard post-acquisition playbook. The first 100 days are when you establish the management reporting package, align metric definitions, and build the reconciliation processes. That is governance. Call it whatever you want, but do it early.
The specific actions for the first 100 days of governance are straightforward.
- Define the 15 to 20 metrics that will appear in the board deck and management package. One definition each. Finance owns the definitions.
- Build monthly reconciliation processes for revenue, customer count, and any KPI the equity story depends on.
- Document the data flow from source systems to financial statements. Identify every manual step and every spreadsheet.
- Cross-train at least one backup person for every critical reporting process.
This is 80 to 120 hours of work spread across the first three months. It is not a program. It is not a project. It is a set of habits that compound over the hold period.
Mistake 3. Treating governance as standardization
The third mistake is more subtle and more damaging. Operating partners who do invest in governance often frame it as standardization. Standard definitions. Standard processes. Standard reporting. The goal is consistency.
Consistency is necessary. But it is not sufficient. The goal of governance at a PE-backed company is not to standardize the business. It is to enable the equity story.
The equity story is the narrative the investment bank will tell buyers about why this company is worth a premium. Revenue is growing through expansion, not new logo acquisition. Margins are improving through operational efficiency, not cost cutting. The customer base is sticky and the retention rate is accelerating.
Every claim in the equity story needs data behind it. Governance ensures that data exists, that it is defensible, and that it tells a coherent story across every dimension a buyer will examine.
What it looks like when governance serves standardization instead of the equity story. A $200M professional services company had a governance framework that standardized all reporting across their five offices. Same chart of accounts. Same KPI definitions. Same monthly reporting template.
The reporting was consistent. But it did not tell the story the investment bank needed. The equity story depended on showing that the company’s newest service line (launched two years earlier) was growing faster than the legacy business and at higher margins. The standardized reporting did not segment revenue by service line vintage. It did not separate new service line customers from cross-sell into existing accounts. It did not track margin by service line.
The data existed in the source systems but had never been organized to support the equity narrative. The company had to build the segmentation from scratch during exit preparation, with limited time and no historical reporting to validate against.
The fix. Design governance around the equity story from day one of the hold.
In the first 100 days, when you define metrics and build reporting, ask one question before each decision: will a buyer need this to validate the equity story?
If the equity story depends on retention, build the retention reporting now, segmented by cohort, by product, by customer size, and by acquisition channel. Do not wait until year three to realize you need it.
If the equity story depends on margin expansion, build the margin reporting at the granularity a buyer will want. By product line, by customer segment, by geography. Document the cost allocation methodology. Track the trend quarterly.
If the equity story depends on the success of a buy-and-build strategy, build the integration reporting. Show organic vs. acquired revenue. Show customer retention through integration. Show the operational synergies in the numbers, not a PowerPoint slide.
Governance that serves the equity story does everything standardization does (consistent definitions, documented processes, reconciled data) but it also ensures the company can prove its value creation thesis with data when exit arrives.
The connection to EBITDA
Here is why this matters in dollars.
The 65% of PE firms that struggle to reflect value creation in exit EBITDA are not failing at value creation. They are failing at proving it. The operational improvements happened. Revenue grew. Margins improved. Customers were retained.
But at exit, the QoE team asked for evidence. The data was not granular enough. The definitions were not consistent over the hold period. The segmentation did not exist. The trend data had gaps from a system migration in year two.
The result: the buyer could see that something improved but could not verify how much. So they applied a discount. Not because the value was not real, but because it was not provable.
Data governance, done right, is the infrastructure of proof. It ensures that every dollar of value created during the hold period can be demonstrated, defended, and reflected in the exit EBITDA that drives the multiple.
At an 11x multiple, every million of provable EBITDA improvement that governance enables is worth eleven million at exit. The cost of the governance work is measured in hundreds of hours. The return is measured in tens of millions.
Where to start
If you are an operating partner reading this and recognizing your own portfolio, here are three actions for this month.
Action 1. Pick one portfolio company. Ask the CFO to produce the monthly KPI package and explain the definition of every metric. Time how long it takes. If it takes more than a day, or if any definitions are unclear, you have a governance gap.
Action 2. Ask the investment bank (or your internal team) to describe the equity story for that company. Then ask the CFO to produce the data that proves each element of the story. The gaps between the story and the data are your governance priorities.
Action 3. Assign ownership. The CFO owns governance outcomes. Not IT. Not a committee. The CFO. Put data governance metrics (reconciliation quality, reporting speed, definition coverage) into the quarterly operating review.
For a structured approach to what buyers test during diligence, start with The Complete Data Diligence Guide. For the timeline of data readiness preparation, see How Long Does It Take to Fix Data Before Diligence?.
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