Case Studies: The Buy-Side and Sell-Side of Transaction Advisory

Wholesale distributor and direct to consumer online retailer of home goods with $32m in annual revenues valued at $85m.

The Company’s founder decided to seek equity investors for a capital infusion to recapitalize and fund the future growth of the Company. The investment banker recognized potential hurdles in normalizing earnings due to lost revenues during a difficult transition to a new ERP system and recommended a sell-side due diligence report to help solidify normalized EBITDA and properly value the Company.

Withum’s team worked with management and the investment bank to outline a full scope sell-side due diligence engagement with specific attention on the normalization of revenue. We worked with Company’s CFO, President and sales and operations managers to trend historical earnings, map customer growth and expansion, and understand the cause and impact of the ERP implementation failures. API failures resulted in lost and delayed customer orders, which caused the Company’s products to lose ranking in customer search engines, ultimately resulting in a significant decline in revenues for several months as they worked to correct the issues and restore their ratings. Our work quantified and supported approximately $1m in lost revenue that was ultimately accepted, without question, as a normalization adjustment to EBITDA in determining the company valuation by the new investor.

The seller was able to maximize the Company’s value by professionalizing the presentation of EBITDA adjustment calculations and supporting documentation through Withum’s advisory team.

A digital education company supported by digital advertising revenue based in Europe.

The Company requested financial and tax due diligence for the proposed acquisition of a digital advertising platform based in New York City with annual revenues of $11m. The target experienced increased margins in the twelve months leading up to the transaction and was in the process of shifting its revenue stream from all advertising dollars to the inclusion of monthly platform subscriptions. Management needed to understand the improved margins and newer recurring revenue stream and their sustainability and impact on profitability.

As part of a full-scope financial and tax due diligence project, Withum’s team obtained monthly data on users, impressions served, revenue per thousand impressions, and demand partner and advertiser concentrations to analyze trends and support management’s assertions regarding profitability improvements and revenue mix changes. Withum’s team also identified concerns related to capitalized costs of software development, where excess costs were capitalized out of operating expenses and therefore excluded from EBITDA in management’s financial models. Further discussions revealed that a significant portion of the capitalized software costs should be viewed as maintenance capital expenditures due to the target’s operational requirement to provide new content to engage users consistently. This adjustment to normalize EBITDA resulted in the renegotiation of the purchase price to more properly reflect the value of the business.

The proposed transaction was structured as an acquisition of stock, therefore tax diligence procedures were expanded to consider potential exposures that would be assumed by the Client. Procedures identified potential favorable items such as untapped research and development credits and exposures such as insufficient nexus studies to ensure proper filing and apportionment to state and local jurisdictions. The tax diligence procedures enabled our Client to properly draft indemnifications and proper planning for post-closing actions to improve compliance and reporting rapidly.

Financial and tax diligence teams with extensive experience in the digital advertising market ensured targeted inquiries and analysis, resulting in the identification of accounting and tax practices that impacted the valuation of the target and allowed our Client to protect its investment through improved financial modeling and tax compliance.

A privately held medical media company providing integrated communication products, services, education, and research to professionals within health care, animal health, and industry sciences with annual revenues of $120m.

The Company requested financial and tax due diligence for the contemplated acquisition of a similar group of companies. The target was comprised of three legal entities with over a dozen titles valued at $110m. Financial diligence required restating earnings to remove discontinued operations and consideration of shifting revenue streams due to market demands and significant declines in core historical offerings. Tax diligence focused on identifying exposures to mitigate risks to our Client.

Withum’s team worked with the Company to design a scope of work tailored to address specific concerns about declining and shifting revenue streams, discontinued operations, quality of billed and unbilled accounts receivable balances, obligations related to deferred revenue and potential unreported or understated liabilities. These targeted procedures assisted management in planning the future direction of the Company and identified a number of debt-like items that were separately negotiated in determining the final purchase price. Tax diligence focused on state and local tax filing requirements, identifying numerous concerns with respect the lack of a formal state nexus study and broad, inappropriate assumptions about non-taxability for sales tax. Identified concerns enabled management to ensure that adequate escrows and indemnifications were written into the purchase agreement.

Leveraging management’s expertise in their industry to develop a targeted scope of work and Withum’s experienced transaction team to refine and implement the plan; the team was able to protect management’s investment by identifying hidden debt-like items for separate purchase price negotiation and providing specific indemnifications for identified state and local tax exposures.

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A provider of data management and business intelligence services for various consumer-facing industries.

The company’s founders and investors recognized a need for additional equity capital to fuel the growth of the Company. Because there were complexities to calculating normalized earnings, such as multiple acquisitions during the historical period, the investment bank recommended a sell-side quality of earnings process to support management in identifying, quantify, and documenting all normalizing adjustments. This preemptive quality of earnings process would prepare management for a quick path to closing.

Withum’s team worked with management and the investment bank to outline a full scope sell-side due diligence engagement with specific attention on normalizing the financial impact of operational changes to the business. We worked with Company’s management to trend historical expenses, map workforce modifications, and understand the cause and impact of certain customer losses. Our work helped quantify and support approximately $1m of normalization adjustments for the trailing twelve-month period. Armed with the data and analysis created, management was able to successfully navigate the buy-side due diligence process and quickly close a deal valued at $22m.

The seller was able to maximize the company’s value and maintain the deal tempo by professionalizing the presentation of EBITDA adjustment calculations and supporting documentation through the use of Withum’s transaction advisory team.

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A financial buyer looking to acquire a platform company for manufacturing and distribution of industrials.

The Client identified a Company specializing in custom manufactured products for manufacturers and offering thousands of standard products through a global distribution network for a potential acquisition (the “Target”).

The Client requested financial and tax due diligence for the proposed acquisition. The Target experienced over 200% revenue growth in the trailing six months. The growth was driven by the addition of large new customers as well as added product lines; some specifically related to needs created by the Covid-19 pandemic. The Client needed to develop expectations as to future revenue streams in order to appropriately value the Target. Further, identified weaknesses in the Target’s financial reporting and inventory tracking practices meant that the Client needed help in understanding the true historical results of operations.

Withum’s team move quickly to develop a supplement to the typical full-scope financial and tax due diligence procedures to address our Client’s concerns about the reliability of the Company’s financial reports and the sustainability of the new revenue streams. To address concerns about the Company’s inventory valuation and costing procedures, Withum’s central analytics team stepped in to quickly analyze years of transaction-level data; revaluing the inventory using the FIFO method and identifying unusual patterns in costing trends. We then performed a rollback of inventory to restate costs and recalculate historical gross margins resulting in a 7% decline in the trailing twelve-month reported gross margin percentage.

Transaction level revenue detail was used to analyze revenue growth by customer and by product line to better understand the sustainability of revenue streams and calculate missing liabilities for customer rebates, payment discounts and other contractual sales credits.

Further, Withum’s team worked with management to estimate multiple unrecorded assets and liabilities to help our client develop working capital expectations and the purchase agreement working capital peg.

Tax diligence procedures identified potential exposures related mostly to state sales tax reporting. The Target was not filing in all required jurisdictions and had improperly excluded certain products from reported sales.

The quality of earnings procedures was able to identify and quantify issues within the Target’s financial reporting and unsustainable revenue growth due to the Covid-19 specific products that had a direct impact on the Company’s valuation. With this supporting analysis, the Client was able to renegotiate the purchase price incorporating forward-looking contingent consideration, to better protect their investment value. Identification of specific concerns around the Target’s sales tax reporting assisted the Client in drafting appropriate protections in the purchase agreement indemnifications and plan for immediate corrective actions post-close.