Diligence Case Study 2

Purchase Price Reduction Resulting from EBITDA Diligence Adjustments and Working Capital Shortfall

About the Company

Client: Private Equity Owned Strategic Acquirer

Industry: Construction & Demolition Waste Hauler; Transportation

Buyer’s Transaction Objectives: a synergistic add-on to platform company — EBITDA growth, multiplier increase, resulting in higher valuation; geographic expansion, service line additions, and revenue diversification, resulting in reduced operational risk.

Seller’s Transaction Objectives: Recapitalization; exit strategy.

Target Characteristics: Family-owned; steady growth; highly profitable; represented by excessively aggressive, highly invested and unethical broker.

Assignment: Financial due diligence/quality of earnings assessment; calculation of working capital target and determination of capital expenditure requirements; preparation of pro forma projections.

Transaction Pricing: Based on EBITDA multiple.

Avant Findings:

  1. Aggressive, highly invested broker nearly jeopardized the deal by, among other things, overly “managing” the diligence process.
  2. Avant reviewed and assessed over 50 management EBITDA adjustments and related issues that included:
    1. Large swings in workers’ compensation insurance adjustments.
    2. Unrecorded cash revenues received directly by owners.
    3. Commingled owner and business expenses.
    4. Inadequate or non-existent supporting documentation.
  3. Avant’s analysis of related party rents determined the inclusion of property taxes and insurance.
    1. However, the seller’s broker attempted to mislead by intentionally excluding those expenses from EBITDA.
    2. Avant’s finding and related adjustment saved the buyer an estimated $350K for this item alone.
  4. Avant identified $600K of adjustments to management’s adjusted EBITDA that resulted in purchase price reduction of nearly $3.5M.
  5. Avant’s analysis of working capital and the related calculation highlighted management’s overstatement which resulted in additional price adjustments.

Avant assessed the company target as having a low quality of earnings. However, based on Avant’s findings, our client realized purchase price savings resulting from EBITDA and working capital adjustments exceeding $4M.

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Diligence Case Study 1

Diligence Case Study 1

Sometimes the Best Deal May Be One Not Done!