UK deal volumes were 30% lower in the first quarter of 2026 than in the same period last year. Yet the total disclosed value of those transactions increased by 36%. The market delivered fewer deals, but larger ones. Experian MarketIQ, which produced the figures, says more extensive due diligence and greater discipline around execution are lengthening the time between announcement and completion.
This is not a market short of capital or willing buyers. It is a more selective market, with a much higher standard of proof.
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Buyers are pricing what they can verify
BCG's 2026 M&A Report, published in September, describes the constraint clearly. Buyer appetite and access to capital are no longer the main barriers to dealmaking. Execution is. The harder question is whether enough businesses are coming to market with the price, quality, readiness and visibility required for a buyer to underwrite them with conviction.
For a seller, that distinction matters. A business may be performing well and still fall short, because buyers are testing more than the performance itself. They need to establish whether an independent party, with no reason to accept management's claims at face value, can verify it.
The return requirements explain the added scrutiny. Bain estimates that a deal which could have met its target return with 5% EBITDA growth ten years ago now needs around 12%. Purchase multiples and financing costs are both unusually high, leaving far less capacity for unexpected problems. A buyer that must deliver 12% annual earnings growth cannot afford to pay for outcomes it cannot substantiate.
The backlog of private equity-owned businesses shows what happens when that confidence is missing. At the end of June 2026, private equity firms were holding more than 33,500 unsold portfolio companies, more than twice the number held a decade ago. The median holding period for sponsor-owned European businesses sold last year was 5.8 years, compared with around 4.6 years for 2020 exits. About a third of sponsor-owned businesses have now remained in their portfolios for more than seven years. This does not mean they are all poor businesses. In many cases, they simply cannot be underwritten at the valuation their owners require.
The point most owners miss
A transaction process does not usually fail outright. More often, the outcome changes in a less visible and more costly way.
If a buyer cannot verify part of the seller's case, they will rarely spend long debating it. Instead, they change how the consideration is structured. BCG identifies the mechanisms being used: earn-outs and rollover equity to close valuation gaps, minority investments and joint ventures to secure access without taking control, and staged acquisitions where the future value remains uncertain.
Although the instruments differ, their purpose is the same. Cash moves away from completion and becomes dependent on a claim the buyer could not validate. The headline price may be preserved, but the amount received on day one, and the timing of the rest, will depend on how much of the valuation case was supported by evidence rather than assertion.
That is why this diagnostic should be run eighteen to twenty-four months before a likely transaction, not when an adviser has already been appointed. Once the data room is being assembled, the underlying evidence cannot be recreated. Many of the measures that influence a buyer need at least twelve months of history before they carry weight.
The Evidence File
Almost every private-company valuation rests on six claims. A buyer will test each of them. An owner needs to know whether the answer is evidenced, merely asserted or still unknown.
1. The revenue will still be here next year
The claim: Revenue is durable.
What a buyer tests: How much of last year's revenue was secured by contract, how much came from customers choosing to return, and how much had to be won again through fresh sales activity.
The evidence standard: A revenue register covering the past three years, separated into contracted, recurring and newly won revenue, with contract end dates, notice periods and renewal rates. An aggregate figure is not enough. The categories must be visible.
This analysis often surprises owner-managed businesses. Revenue can feel dependable while, in practice, a small group of people must win it back every year. That carries a very different risk from a contracted order book. Neither model is inherently wrong, but one can usually support a higher multiple. It is better to understand which model you have before a buyer reaches the conclusion for you.
2. The customers are not going anywhere
The claim: Customer relationships belong to the business.
What a buyer tests: The effect on earnings if the three largest customers leave, and whether those customers see their relationship as being with the company or with a particular individual.
The evidence standard: Thirty-six months of revenue and gross margin by customer. A named relationship owner for every significant account. Evidence of the cost or difficulty of switching, whether that comes from integration, accreditation, tooling, data or contractual commitment.
Customer concentration does not automatically warrant a discount. A twenty-year relationship with a blue-chip customer can be highly valuable when it is protected by a long-term contract and embedded in the customer's operations. If the same relationship depends on the founder playing golf with the customer's operations director, it is a risk. A buyer will value it accordingly.
3. The margin is a structure, not an outcome
The claim: Profitability is repeatable.
What a buyer tests: Whether management understands what produces the margin beneath the overall blended figure.
The evidence standard: Gross margin by product, contract, project or service line, monitored over time. A record of pricing. Clear discounting authority and the basis on which discounts may be approved.
A single blended gross-margin figure offers a buyer very little. They want to know whether the company can identify which work makes money, which work does not, and what management has done with that information. If a business found two years ago that one-fifth of its revenue was loss-making and corrected the problem, it has shown an important management capability. If it still cannot produce the analysis, it sends a very different signal.
Where this evidence is missing, the ten-deal margin review provides a quicker route to building the first version of the analysis.
4. The business runs without you
The claim: Management is capable and independent.
What a buyer tests: Which decisions still require the owner's personal involvement, and what would cease or stall if the owner were absent for a month.
The evidence standard: A record of decisions escalated to the owner during the previous quarter, including the type and value of each one. Written approval limits. Proof that decisions have genuinely been delegated, shown by a second-tier manager making the call and that decision remaining in force.
For many owner-managed businesses, this is both the largest source of lost value and the slowest weakness to address. Installing a managing director six weeks before a sale process proves very little. Making the appointment eighteen months earlier, then showing that the company continued to trade normally throughout the transition, provides meaningful evidence. The gap often makes the case for a properly managed senior appointment instead of a convenient internal promotion. The senior hire test covers that decision in more detail.
5. The numbers you produce turn out to be right
The claim: The forecast can be believed.
What a buyer tests: The company's previous record of delivering against its own forecasts.
The evidence standard: Three years of forecast-versus-actual results for revenue, gross margin and EBITDA, supported by a short written explanation for every material variance.
Of all six tests, this is the least expensive to establish and often the most persuasive. A business that has forecast to within a few percentage points for three years has already provided evidence that its plan is credible. Without that record, a buyer is being asked to rely on projections from a management team with no demonstrated forecasting accuracy. The first position helps defend the full price. The second creates a case for an earn-out.
Simply starting the record is not enough if the forecasts remain unreliable. The value lies in the management discipline that makes them accurate, and developing that discipline takes at least a year.
6. AI does not quietly remove your earnings
The claim: The business model is durable against technology change.
What a buyer tests: The share of revenue attached to work that could be automated, disintermediated or repriced during the buyer's intended holding period.
The evidence standard: A map linking revenue to the work performed, with a clear view of which elements are exposed. If the business has already used AI to alter its cost base or capability, it should also show what changed and what was saved.
BCG makes the issue explicit. AI is generating deal activity while also making certain assets more difficult to value. It expands the range of plausible outcomes, which in turn widens valuation gaps. During the first half of 2026, buyers shifted towards companies with physical or labour-intensive elements and domestically focused revenue. BCG's conclusion is that confidence in the underwriting now matters more than the sector label.
For a services company, the immediate danger is not necessarily that a buyer believes AI will destroy the business. It is that the buyer cannot determine the likely effect, adopts the worst-case assumption and prices the uncertainty. Evidence can narrow that gap in the seller's favour. Our article on AI agent workflow readiness explains how to build evidence that can withstand scrutiny.
Scoring your own business
Give each of the six claims a score:
2 points. Evidenced. You could provide the documents to an independent third party today and they would arrive at the same conclusion.
1 point. Asserted. You believe the claim and could make a case for it, but the analysis is not available in a form that somebody else could verify.
0 points. Unknown. The business does not yet have the answer.
10 to 12: underwritable. The business is ready to support a competitive process and defend its price. The focus can move to presentation and timing.
6 to 9: partly underwritable. Expect the consideration to be structured. Unless the identified weaknesses are closed first, a meaningful portion of the headline price is likely to be deferred or made contingent. This is the most common result and the range in which twelve months of preparation can have the greatest effect.
0 to 5: not yet underwritable. Taking the business to market now creates a risk of a failed process. That is costly, may become known across the sector and can make a later attempt more difficult. The immediate work is operational rather than transactional.
What each gap actually costs
The total is less important than understanding the commercial response each gap is likely to trigger.
The pattern in the right-hand column is important. Four of the six responses leave the seller financially exposed to the company after the sale has completed.
The twelve-month sequence
The weaknesses require very different amounts of time to resolve, so the order of work is relatively clear.
Weeks, not months. Create the contract register, including expiry dates and notice periods. Analyse three years of revenue and gross margin by customer. Document the current approval thresholds. These are primarily analytical tasks, and the underlying data will usually already exist.
One to two quarters. Establish margin analysis beneath the blended figure, then act on the findings. Begin a formal forecast-versus-actual record and explain material variances in writing. Map revenue to the work being delivered and form a clear view of the company's technology exposure.
Twelve months or more. Develop a credible forecasting history, which means allowing at least a year for forecasts to be tested against results. Delegate decisions in practice and build a record that proves it. If a senior appointment is needed, make it early enough for the company to trade through the leadership transition.
The final group explains why preparation must begin early. None of those items can be compressed into the closing stages of a process.
Warning signs
Five signs that the evidence is weaker than management may assume:
- The monthly management pack looks much the same as it did three years ago.
- Producing gross margin by customer takes a week of work.
- Each annual forecast is rebuilt without being compared with the previous one.
- Decisions worth less than £25,000 still require the owner's approval.
- When asked why a contract was won, the answer is the name of an individual.
None is a crisis in isolation. Every one of them will affect how risk is priced.
What this is really about
The Evidence File is useful because most of the weaknesses it exposes begin as management problems and only later become valuation problems. A company that cannot explain its margin has a control problem. If the owner is still approving low-value invoices, it has a delegation problem. If it cannot forecast reliably, it has a planning problem.
Addressing those issues makes the company better run, even if no transaction takes place. The valuation benefit follows from the operating improvement. That is why the work remains worthwhile for an owner who has no immediate plan to sell.
Allington Advisors helps founders, CEOs and leadership teams close the gap between the performance they see inside the business and the evidence available to an outside party. If you expect a sale, investment or refinancing within the next three years, a transaction readiness review can establish where the business stands today and which gaps are worth addressing first.