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.

Avant Findings:

  1. Management adjusted EBITDA determined reasonable.
  2. However, Avant identified significant issues and pro forma adjustments, including:
    1. 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.
    2. 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.
  3. Based on a deep dive into supporting contracts, Avant determined revenues targets as achievable.
  4. However, Avant expressed significant concerns that included:
    1. Revenue-based earnout was not appropriately aligned with long-term Company profitability.
    2. Projected expense increases and high capital expenditure requirements would compress EBITDA and strain-free cash flows.
    3. 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

Diligence Case Study 2

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