Buying from a sponsor: what the third VDD on the same asset won't tell you

When an asset reaches its third financial owner, adjustments from earlier vendor reports pile up. How to re-read add-on EBITDA, recurring one-offs and W&I exclusions before you sign.

Sponsor-to-sponsor deals made up 76.1% of European private equity exit value in the first quarter of 2026, according to PitchBook, against 49.6% for 2025 as a whole. In France, secondary buyouts and trade sales remain the usual exit routes, with the IPO window still largely shut and continuation funds taking a growing share of the rest. For a mid-cap buyer, this means more of the assets on offer have already been through two or three sale processes.

Each of those processes produced a vendor due diligence report. Each report was written for one sale, at one date, by an adviser instructed by the seller. Read one at a time, they are usually sound. Read together, they often show the same adjustments carried forward, restated or quietly enlarged. The third VDD does not lie, but it rarely tells you how its adjusted EBITDA was built across the previous two owners.

This note sets out how we re-read that history on a tertiary deal, and why it matters for the buyer, the lender and the W&I insurer.

Ask for the earlier reports, not only the current one

The first request in the data room is simple: the two previous VDD reports, the previous buyer's FDD if the seller holds it, and the bridge each one drew from reported to adjusted EBITDA. Sellers sometimes resist, saying the earlier reports are out of date. That is the point. We are not reading them for the numbers of 2020 or 2022. We are reading them to see which adjustments were created when, and whether they were ever reversed.

Where the earlier reports cannot be obtained, the audited accounts and management packs for the same years serve as a weaker substitute. The gap itself goes in our report.

Add-on EBITDA counted twice

Buy-and-build is the usual route to a third owner, so most tertiary targets have made several acquisitions. The risk is that the pro forma EBITDA of an add-on is counted once by the owner who bought it and again by the one who sells it.

A typical pattern, simplified from what we see:

• Owner 2 buys an add-on with €1.5m of EBITDA. Its VDD shows group adjusted EBITDA including a full-year pro forma for the add-on, plus €0.6m of "identified synergies" (procurement, a shared site).
• Owner 3 sells two years later. The add-on is now fully in the reported numbers. The synergies have partly come through, perhaps €0.3m, which is already in reported EBITDA.
• The new VDD adds back "remaining run-rate synergies" of €0.5m, on a different basis (a new procurement programme), and a pro forma for a newer add-on bought four months before signing.

Part of the €0.5m may be genuine. But the original €0.6m has never been reconciled, and part of the new programme covers the same spend categories as the old one. On a €60m enterprise value at 10x, €0.3m of synergies counted twice is €3m of price.

What we do: rebuild each acquisition's EBITDA from the date it joined the group, track every synergy announced against what actually came through in the accounts, and refuse any synergy that has already appeared in a previous owner's bridge unless the seller can show it is incremental. For the most recent add-on, we test the pro forma against the add-on's own monthly accounts, not the seller's integration plan.

Lenders have good reason to care. S&P's study of addbacks in leveraged deals found that adjustments averaged 29.4% of management-adjusted EBITDA, with synergies and cost savings the largest category, and that sponsor-owned borrowers missed their projected leverage by a median of 2.7 turns in the first year. IOSCO's 2024 report on leveraged finance noted that synergy addbacks were historically capped at 5% to 25% of EBITDA and that synergies realised more than 24 months out deserve scepticism. A tertiary deal is where those caps are most easily exceeded without anyone noticing.

Recurring "non-recurring" items

The second pattern is the one-off that recurs. Restructuring, recruitment fees, IT migration, consultancy on "transformation": each VDD adds them back as exceptional for the period it covers. Put the three reports side by side and the picture changes.

On this simplified example, €1.4m of the €2.2m added back in VDD 3 appears in all three reports, and the remaining €0.8m in the last two. On a €60m deal, that is not a rounding difference. We do not reject every such item. Integration costs, for instance, may stop if the new owner does not intend to keep acquiring. But that is a question for the buyer's plan, and the price should reflect the plan the buyer will actually run, not the one the seller describes.

The same test applies to working capital. If each owner built a cash peak at its sale date, the "normal" level in the current VDD may be the lowest the business has carried in a decade. Monthly NWC over the full holding periods of the last two owners gives a fairer peg than the last twelve months alone.

W&I: the policy follows the scope

Sponsor exits typically come with buy-side W&I insurance, and the seller's warranty package is often thin as a result. That puts weight on the policy, and the policy depends on the due diligence.

Three points are worth stating clearly to a buyer.

1. What you know is excluded. Matters disclosed in the data room or identified in the DD reports are generally outside cover. A problem found in VDD 2 and repeated in VDD 3 is known. It needs a price adjustment or a specific indemnity, not a warranty.
2. What you did not look at is excluded too. Underwriters review the DD reports and hold an underwriting call. Where a warranty area was not diligenced, or only lightly, it is excluded or partially covered in the warranty spreadsheet. Transfer pricing, environmental condition and the physical state of assets are common cases.
3. Financial statements are where the money is. Marsh's 2026 claims report found that breaches of financial statement warranties accounted for 52% of paid losses in 2025, with notifications up 34%. Aon's 2026 study found that 68% of amounts paid were calculated on a valuation multiple. A claim on overstated EBITDA is a claim on the multiple, which is why insurers read the quality of earnings section closely.

The practical consequence is that the scope of a buy-side FDD on a tertiary asset should be set with the W&I policy in mind, not reduced because a VDD exists. If we rely on the VDD for net debt and stop there, the underwriter will treat the debt-like items as reviewed only to the extent the vendor's adviser reviewed them. If our work on add-on EBITDA and the historical bridge is in our report, the financial statement and accounts warranties are much more likely to be fully covered.

What to do

• Ask for every previous VDD and FDD on the asset in the first data room request, and record in the report which ones were refused.
• Rebuild adjusted EBITDA by acquisition, from the date each add-on joined, and reconcile every synergy announced by any owner to what reached the accounts.
• Lay the adjustments of all available reports side by side, item by item, before accepting any as non-recurring.
• Set the NWC peg on the full history, not on the twelve months the current owner chose.
• Agree the FDD scope with the W&I broker early, so the warranty areas that matter most (accounts, tax, debt-like items) are covered by work the underwriter can rely on.
• For lenders: apply caps and time limits to synergies on the reconciled figure, not on the number in the third VDD.

This note is general information, not advice on a specific transaction.