Poor Earnings Quality and Customer Churn Are Now the #1 and #2 Diligence Killers in PE — What Operating Partners Must Do Before the Next Process
The Bain/StepStone 2026 GP Survey named poor earnings quality and customer churn as the two most common reasons deals stall. I want to be direct about what that actually means — and what it doesn't.
This is not primarily a diligence team problem. It's a problem that starts much earlier, in how portfolio companies were built to track and defend their revenue.
The Context You Already Know
McKinsey's 2026 Global Private Markets Report puts 52% of PE buyout inventory past typical exit windows — a record. Multiple expansion as a return driver is effectively gone; EY's PE Pulse data shows expectations for multiple expansion at a record low.
When you can't expand the multiple and you can't time a macro tailwind, the only lever left is demonstrable operational quality. And the diligence community has been specific about where the gaps show up first: revenue that can't be verified and customers who are leaving.
Why These Two Problems Are Actually One
Operating partners often treat earnings quality as a finance problem and churn as a CS or product problem. That separation is where things go wrong.
Both are downstream of the same upstream gap: the company never clearly defined who their best customers are, why those customers buy, and what keeps them. When that definition is missing, you close deals that look like ARR but behave like project revenue. Those customers leave. The NRR tells the story in diligence.
The relationship between NRR and exit multiple has been documented: a company at 113% NRR commands a revenue multiple roughly five times higher than one at 98% NRR, according to Lever A Partners' analysis of SaaS transactions. That's not a rounding error — it's the difference between a process that closes and one that stalls on earnings quality questions.
I want to be honest about the limits of that stat: it comes from one firm's deal data, not a peer-reviewed study. But the directional logic holds up across what practitioners report seeing in diligence.
The Comparability Problem
Most operating partners can tell you which holding is performing. Fewer can explain why in terms that survive a buyer's diligence team — because GTM metrics are typically defined differently at each company, reported inconsistently, and never tied to a common framework.
When a diligence team asks for cohort retention, ICP concentration, or pipeline-to-revenue conversion by segment, the answer should come from a standing operating system — not a three-week data pull assembled under deadline pressure. The companies that fail on earnings quality and churn in diligence aren't always the worst performers. They're often companies that performed adequately but were never set up to prove it.
That's a fixable problem. But only if you start before the banker engagement letter.
What Operating Partners Can Do Now
Audit your exposure before a buyer does. For every holding within two years of a planned exit, map the earnings quality risk: revenue concentration, contract structure, NRR trend, and how clearly the company can define which customers drive durable revenue. The gaps you find are the gaps a diligence team will find — the difference is you have time to close them.
Standardize how you measure GTM health across the portfolio. A consistent diagnostic applied across holdings gives you comparability for LP reporting and board reviews. It also gives you an early warning system — churn and earnings quality problems are visible quarters before they surface in a P&L, if you're measuring the right things.
Build the ICP and retention story before the process starts. The narrative a buyer needs — who buys, why they stay, what the expansion motion looks like — should be a living operating document. Companies that can produce this cleanly tend to command better terms and shorter processes. Companies that produce it under deadline pressure tend to produce it inconsistently.
Treat GTM as a governed function at the portfolio level. Leadership turnover at a holding shouldn't reset the revenue quality story. The frameworks and documentation should survive any single operator.
FAQ
Why are poor earnings quality and customer churn the top diligence killers in PE right now?
Because multiple expansion is off the table and the exit backlog is at a record high, buyers have less room to underwrite risk. When a buyer can't assume they'll expand the multiple post-close, they need to trust the revenue they're buying. Poor earnings quality and high churn are the two clearest signals that the revenue can't be trusted — which is why the Bain/StepStone 2026 GP Survey found them at the top of the list.
What does 'earnings quality' actually mean in this context?
In diligence, earnings quality questions usually come down to: Is this revenue recurring or one-time? Is it concentrated in a few customers? Is it growing from the right customers or from deals that required unusual discounting or terms? A company with strong top-line growth but poor earnings quality is one where the revenue story doesn't hold up under scrutiny — and buyers price that risk heavily.
How early should operating partners start addressing this?
The honest answer is: earlier than feels necessary. Two years before a planned exit is a reasonable minimum. One year is tight. Six months is damage control. The companies that show up to diligence with clean retention data and a clear ICP story didn't build that in response to a process — they built it as part of how they operate.