🌟 Hello, Reader

As we bid farewell to 2025, KSMC extends heartfelt wishes for a prosperous New Year—may 2026 bring you successful ventures and abundant opportunities!

Welcome to Issue 15 of Double Klick, your bi-weekly briefing on M&A, finance, and AI innovation. This year-end edition marks our final issue of 2025, as we reflect on a year of insights and look ahead to the opportunities that await.

Let's explore what's new in today’s issue.

Warm regards,
Kapil Sukhija
Founder, KSMC

📊 Deal Strategy Deep Dive

Quality of Earnings in M&A

What This Means: Quality of Earnings (QoE) is a critical due diligence exercise that goes beyond the numbers in financial statements to assess the true, sustainable profitability of a business. Unlike a standard audit that verifies historical accuracy, a QoE analysis examines whether reported earnings reflect the ongoing operational reality and identifies adjustments needed for a normalized view of performance.

QoE reports have become essential tools for buyers, lenders, and investors. They uncover accounting irregularities, one-time items, aggressive revenue recognition, and hidden risks that could materially impact valuation and deal structure.

Common Challenges:

• Sellers may present EBITDA that includes adjustments or add-backs that buyers view as aggressive or unsupported, leading to valuation gaps

• Revenue recognition practices can vary significantly, especially in businesses with subscription models, milestone-based contracts, or complex service arrangements

• Working capital requirements and cash conversion cycles are often misunderstood or understated, affecting post-close liquidity

• One-time expenses, customer concentration risks, and key person dependencies may be buried in financial details

• Buyers who skip or rush QoE analysis to accelerate timelines often discover material issues post-closing, leading to disputes and earnout complications

Real Deal Context: We recently advised a private equity firm acquiring a Pennsylvania based Document Management Software company. The QoE exercise involved extensive negotiations around the Target Net Working Capital (NWC Peg), with particular focus on deferred revenue treatment. Our analysis examined the cost-to-serve existing customer contracts against collected revenues to ensure the negotiated peg would provide the buyer with adequate post-closing liquidity and operational flexibility. We continued our engagement post-close to validate the final working capital settlement against the target.

The NWC Peg (Target Net Working Capital) is a negotiated benchmark—typically based on historical averages—that represents the expected working capital level a business needs to operate normally. At closing, the actual working capital is measured against this peg: if it's lower, the buyer receives a dollar-for-dollar purchase price reduction; if higher, the buyer pays more. This mechanism protects buyers from inheriting a business that's been stripped of operating cash while ensuring sellers aren't penalized for maintaining healthy working capital levels.

Suggested Success Factors:

• For buyers: Engage experienced QoE advisors early in the process. Focus not just on adjustments but on earnings sustainability, customer retention, and cash generation patterns

• For sellers: Prepare a sell-side QoE report before going to market. Address known issues proactively and support add-backs with clear documentation to reduce buyer concerns

• For both parties: Align on methodology and normalization adjustments early. Use QoE findings constructively to inform purchase price adjustments, working capital pegs, and escrow terms rather than as deal-breakers

• For advisors: Ensure QoE scope covers industry-specific risks, regulatory compliance, and integration considerations—not just standard financial adjustments

Informative Content: In a recent video podcast, I explored the nuances of Quality of Earnings, essential deal considerations, the evolving role of AI in deal execution, and more. Watch the full discussion here.

Share Your Perspectives: Quality of Earnings analysis is the foundation of informed deal-making, protecting value and building trust between parties. Have you encountered significant QoE findings that reshaped a transaction? We would be interested to know how you addressed the issues and moved forward.

🌍 Global Pulse

2026 Investment Outlook: An Year Demanding Active Decision-Making

As markets close out 2025 near record highs, the path forward demands selectivity. We cover actionable takeaways accross various asset classes below.

The Equity Paradox

U.S. equities trade at historical valuation extremes, concentrated in mega-cap tech stocks increasingly funding AI infrastructure through circular debt arrangements. Yet value stocks remain attractively priced versus historical averages, suggesting mean reversion potential as Fed rate cuts support broader growth. Emerging markets like Korea, Taiwan, and China offer tech exposure at compelling discounts.

The Cash Trap

Money market assets remain elevated despite declining yields as the Fed cuts rates. With yield curves steepening, bonds offer superior total return potential. The 2-5 year maturity sweet spot provides attractive income with capital appreciation upside, while global diversification across UK, Australia, and select emerging markets enhances risk-adjusted returns.

Real Assets in Focus

Gold has surged past $4,300/oz as central banks accumulate reserves faster than Treasuries, driven by geopolitical hedging and dollar diversification following the 2022 Russian asset seizure. While momentum has pushed prices beyond fundamentals, structural support remains intact. Broad commodity allocations capture AI infrastructure demand for copper, lithium, and energy while providing inflation protection.

Credit Market Caution

Despite tight credit spreads, stress signals are emerging in private lending markets. Investment funds focused on corporate loans are trading at 10% discounts to their underlying asset values, while struggling borrowers increasingly pay debt with more debt—pushing US shadow default rates to 6% from 2% in 2021. Opportunities remain in large-scale financings, consumer credit, and quality real estate lending.

US Municipal Bond Opportunity

US municipal bonds offer strong value for taxpayers, combining elevated yields with solid fundamentals backed by healthy state and local government balance sheets. These tax-advantaged bonds are positioned as top risk-adjusted opportunities for 2026. However, selectivity matters: avoid over-leveraged infrastructure projects from 2016-2021, and instead target private placement bonds offering investment-grade quality at attractive yields.

The Bottom Line

2026 is expected to reward active management over passive positioning. Rotate from cash to quality bonds, tilt toward undervalued equities, size real assets carefully, and stay selective in credit.

🤖 AI Tools Spotlight

Taplio

Taplio is an AI-powered LinkedIn growth and content creation platform designed for professionals, entrepreneurs, and businesses looking to build their personal brand and expand their network. The tool combines content generation, scheduling, analytics, and engagement automation into a single platform.

What The Tool Does?

• AI-assisted post creation using proven templates and viral content patterns

• Content scheduling with optimal posting time recommendations

• LinkedIn analytics tracking profile views, post performance, and follower growth

• Lead generation including profile scrapers and CRM integration

• Boost post visibility

• Content inspiration library with high-performing posts from your industry

Why It Matters?: LinkedIn remains the primary platform for B2B relationship building, yet most professionals struggle with consistent, high-quality content creation due to time constraints. In an industry where relationships drive deals and trust is currency, tools like Taplio enable professionals to maintain consistent thought leadership without sacrificing billable hours or deal execution focus.

Explore the tool here.

💭 Dealmaker’s Quote

“A little company that develops a good product and grows into a big company is what gives you the 100-to-1 returns.”

— Ralph Wanger

🏢 About Us

KSMC is a Toronto-based boutique advisory firm founded by Big 4 alumni driven by an entrepreneurial and innovative vision. We provide comprehensive M&A Advisory Services, strategic CFO Consulting, and tailored Accounting Solutions. Our expertise and network spans the complete transaction lifecycle—from financial due diligence (QoE reviews) and business valuations to full sell-side mandates—serving middle-market clients across industries in Canada, U.S., UAE, India, Puerto Rico, and Botswana.

Know more and reach out to us here.

Disclaimer: This newsletter is provided for informational purposes only and does not constitute any form of advice. We do not have any sponsorship, affiliate, or commercial arrangements with any companies, tools, or services mentioned in this newsletter. All examples and case studies are based on publicly available information and are included for educational purposes only.