Executive Summary
Withum’s Transaction Advisory team assisted a private equity firm in acquiring a landscape construction company and evaluating the target’s financial reporting processes.
The team identified deficiencies in their financial reporting function, provided recommendations for improvement, evaluated the seller’s EBITDA, and identified adjustments that resulted in a restructuring of the purchase agreement. Withum now performs an annual financial statement audit of the acquired company.
The Client
A lower middle-market private equity firm in the Northeast Region that specializes in providing flexible, structured capital solutions tailored
for small, management-owned businesses. The client was targeting a landscape construction company for acquisition, valued at $9 million with annual revenue of approximately $25 million.
The Challenge
The client identified real potential in the target company. Founder-owned and managed, the target was a successful business but
functioned with very basic accounting and data tracking systems. The client aimed to acquire the target and implement operational improvements to boost the bottom line and further grow the company.
During discovery, Withum uncovered imperfect and incomplete data in the target company’s ecosystem. Withum found that the target company was not reporting financials on a GAAP basis, requiring the recalculation of revenue recognition using percentage of completion to achieve compliance. The client turned to Withum for guidance on how to properly value the target’s financial statements and correct these gaps and insufficient processes moving forward.
The Approach And Solution
The Withum team dove into the engagement with financial and tax due diligence expertise, leveraging their specialty in managing through insufficient data and finding unique ways to solve problems, gather all relevant information and deliver valuable reporting for the client. Working within the dynamic acquisition environment between the target and the client, the team was able to validate key financial reports relevant to the buyer efficiently, meeting tight deadlines necessary for deal close.
The approach consisted of four phases: planning, discovery, development and timeline.
- PLANNING The planning phase involved a collaborative approach with the client to determine relevant action items and key areas of concern.
- DISCOVERY The discovery phase included collaborating with the target company’s management team, conducting an analytical
review of financial and supplemental information, and understanding their financial reporting process and systems. - DEVELOPMENT The development phase involved devising ways to gather and accumulate data from available sources to deliver a Quality of Earnings report and support the transaction close.
- TIMELINE The deal involved a very tight timeframe; the Withum team delivered the final report to the client in a timely manner,
giving periodic updates on key findings to the client and adjusting the approach accordingly along the way.
As discovery and development progressed, the team identified proposed seller adjustments to EBITDA that were not fully supported. The team found various gaps and inconsistencies, ultimately rejecting numerous adjustments and finding appropriate adjustments of their own. These adjustments result in a renegotiation and restructuring of the purchase agreement.
The Results, ROI
Withum’s evaluation of the seller’s EBITDA and due diligence adjustments resulted in a restructuring of the purchase agreement, which was ultimately beneficial to the buyer. Withum then recommended strategies for the target company to improve its financial reporting function and deliver more accurate and timely data moving forward. Withum’s identification of the seller’s insufficient processes and guidance towards improvement provided the client with a higher level of comfort with the company they were acquiring and confidence in the stability of its future within their portfolio.
Following the deal, the client brought Withum on to perform the audit for the acquired company, demonstrating the client’s confidence in Withum’s services and expertise in financial reporting processes and allowing the Withum team to contribute to the acquired company’s long-term sustainable success.
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