Diligence Case Study
Sometimes the Best Deal May Be the One Not Done!
About the Company
Client: Private Equity Owned Strategic Acquirer
Industry: Waste management and recycling services
Buyer’s Transaction Objectives: A synergistic add-on to platform company — EBITDA growth, multiplier increase, resulting in higher valuation; vertical integration; geographic expansion, and revenue diversification, resulting in reduced operational risk.
Seller’s Transaction Objective: Recapitalization, capital return, liquidity, and growth capital at a reduced cost; risk mitigation.
Target Characteristics: Expansion stage company and related capital needs; high growth infrastructure and regulatory compliance challenges; safety management, increased risk, and insurance costs.
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 revenue target (an implied EBITDA multiplier), including earnout contingent on future revenue thresholds.
Other Deal Points: Owner/seller compensation as CEO, plus equity share.
- Management adjusted EBITDA determined reasonable.
- However, Avant identified significant issues and pro forma adjustments, including:
- Projected headcount growth resulted in dramatically increased health insurance costs mandated by government coverage regulations. The combined health insurance cost represented a significant negative synergy.
- Multiple vehicle accidents affected seller’s vehicle insurance rating that would result in an increase in the buyer’s total base insurance costs, representing a negative acquisition synergy.
- Based on a deep dive into supporting contracts, Avant determined revenues targets as achievable.
- However, Avant expressed significant concerns that included:
- Revenue-based earnout was not appropriately aligned with long-term Company profitability.
- Projected expense increases and high capital expenditure requirements would compress EBITDA and strain-free cash flows.
- Expected growth would occur at an uneconomic cost.
Accordingly, the Buyer understood that the negotiated purchase price was not financially justified and opted to withdraw from the transaction.
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Diligence Case Study 2
Purchase Price Reduction Resulting from EBITDA Diligence. Adjustments and Working Capital Shortfall