Client Overview

Our client, an investment group, sought our expertise to identify and acquire professional service companies with an EBITDA of approximately $1 million. Our role was to analyze potential target companies and provide comprehensive due diligence to ensure a sound investment.

Engagement Process

1. Initial Engagement:
   • The investment group engaged us to evaluate potential target manufacturing companies that met their investment criteria.
2. Due Diligence and Normalizing Adjustments:
   • Upon selecting a viable target, we conducted an in-depth due diligence process.
   • We performed a detailed analysis of the target’s financial statements, focusing on normalizing adjustments to EBITDA to present a true picture of the company’s financial health.
3. Expense Identification:
   • Through inquiries with the target’s bookkeeper and a meticulous examination of the general ledger, we identified several expenses that had not been historically accrued for.
   • One significant finding was the under-accrual of employee paid-time-off, which represented a substantial liability that our client would inherit post-acquisition.
4. Evaluation of Working Capital Needs:
   • We were also engaged to evaluate the working capital needs of the business to determine the target working capital.
   • This assessment ensured that the client had a clear understanding of the working capital required to maintain smooth operations post-acquisition.
5. Negotiation of Purchase Price:
   • Recognizing the financial impact of the unrecorded liabilities, we advised our client on the implications.
   • Using our findings, we successfully negotiated a reduction in the purchase price by approximately $100,000, ensuring a more favorable deal for our client.
6. Post-Close Working Capital Review:
   • After the acquisition, we reviewed the actual working capital compared to the target.
   • We assisted in determining the necessary purchase price adjustment based on the working capital evaluation, ensuring our client was compensated for any discrepancies.
7. Expertise and Value Addition:
   • Our team’s expertise in GAAP and years of experience in financial statement auditing enabled us to quickly identify accounting discrepancies.
   • This proficiency allowed us to unlock significant savings for our client through precise purchase price adjustments.

Outcome

Our client successfully acquired the target professional service company at a reduced purchase price, effectively mitigating potential financial risks. Our comprehensive due diligence, working capital evaluation, and negotiation strategies ensured that the client achieved value for their investment while being fully aware of the target’s financial obligations.

Conclusion

This case highlights our capability to deliver value to clients by leveraging our financial expertise to identify hidden liabilities and negotiate better terms. Our thorough due diligence, working capital assessments, and financial acumen are crucial in safeguarding our clients’ investments in the competitive M&A landscape.