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