- Does the vendor of the target company you are looking at argue that significant cost savings have been made and expect you to pay a multiple of these savings?
- Has your company had a significant change in its customer base right before your planned exit?
- Have you been presented with a vendor due diligence report and ever wondered what more should be done?
- When should you start to focus on the structuring of a deal?
- Are you thinking of investing in Russia and need help with the acquisition to an existing business?
- Do you need a flexible and professional deal advisor to help you with your due diligence and structuring needs?
1. Does the vendor of the target company you are looking at argue that significant cost savings have been made and expect you to pay a multiple of these savings?
We were initially commissioned to conduct limited financial and tax due diligence for a secondary buy out transaction.
The target company’s management team was confident that a series of historical profitability improvement projects that they had carried out prior to the envisaged exit had given rise to yearly cost savings across the organisation which they approximated at €30 million.
We immediately involved PwC operational due diligence specialists to look further at management’s assertions. The operational due diligence team was led by Peter Sikow, a Partner in our Performance Improvement group.
Through discussions with the target’s management team and after interogation of the target’s own financial systems our operational due diligence team were able to prove through both a bottom up and top down analyses that actual cost savings had been some €10 million lower than the management’s estimate. This allowed us to report on a solid run rate adjusted EBITDA.
We also identified certain one off type items hidden within the operating results which had not been flagged to our client by management. After a certain level of investigation some of these items were determined to be non-recurring in nature. This allowed us to present a positive adjustment to EBITDA which more than offset the negative run rate adjustment referred to above. The end result was the development of a picture of the business that showed a sustainable run rate adjusted EBITDA over and above management’s own view.
The additional analysis and input from our operational due diligence team enabled our client to draw better comparisons with the historical development of the business on an adjusted run rate basis and, in so doing, be more comfortable with management’s own forecasts.
To the top
2. Has your company had a significant change in its customer base right before your planned exit?
We were appointed to prepare a vendor due diligence report to support an ongoing divestment programme.
Our initial planning highlighted a significant shift in the customer profile of the business to be divested. It was agreed that we would extend the scope of our vendor due diligence report to include market due diligence which addressed a number of critical deal issues up front.
The market due diligence work was led by David Larsson from our Deals Strategy Group and supported by Janne Aaltonen and his team in Helsinki.
Our work on forecasts became very revenue focused with some very important insight being provided by our market due diligence specialists. Vulnerabilities regarding the replacement of existing key products and renewal or cessation of key customer agreements were fully explored and our client was better able to present its own view on how it expected the market to develop once our market due diligence team had finalised their own independent and objective view on the likely scenarios.
To the top
3. Have you been presented with a vendor due diligence report and ever wondered what more should be done?
We were appointed to conduct top-up buy side due diligence where the vendor had already commissioned a broad scope vendor due diligence report.
With our assistance, our client identified a number of areas in which further due diligence was warranted. Two key areas were to further analyse the treatment of net debt and working capital. Our financial due diligence team obtained detailed breakdowns of the balance sheet items and following extensive interviews with target management identified a series of items that should have been classified as net debt (ie, deferred consideration, delayed capex spend, off balance sheet pension liabilities, finance lease liabilities, etc.). Such items were then either negotiated to be part of net debt or then hard-wired into our client’s own assessment of the target’s enterprise value.
Our team then made a further analysis of the working capital development and noted that the LTM average and monthly trend differed considerably once certain net debt items had been removed and certain other non-trading items were excluded. This analysis enabled our client to make a more reliable comparison between actual and underlying working capital and also provided a useful trend to compare against management’s forecast working capital.
To the top
4. When should you start to focus on the structuring of a deal?
We were appointed to perform a financial due diligence investigation of a privately-owned group of companies in Russia. The Target had major operations in Moscow and Moscow region, but there were also several companies in other cities of Russia. The PwC work effort was coordinated out of Finland by our Finnish based Russian Desk team.
We very quickly identified that the Target's operations consisted of more than 20 legal entities with some additional 70-80 related parties, which were involved in the operations. The Target had also used some aggressive tax-planning and tax-optimisation mechanisms which added further complexities to the work at hand.
Identifying these issues early on meant that we were able to help our client proceed with due diligence in a more efficient manner. The process became more structured and cost efficient with financial, tax and legal efforts concentrated around the one legal entity that needed to be acquired and on a limited number of other issues critical from the point of view of the new structure.
Some of the major driving factors for the new structure were (i) the need to decrease the complexity of the Target (ii) minimisation of tax risks and (iii) to address legal documentation issues. Simultaneously, actions to eliminate unofficial operations and the removal of higher risk tax-optimisation mechanisms were taken.
To the top
5. Are you thinking of investing in Russia and need help with the acquisition to an existing business?
Our Helsinki based Russian Desk team was requested to perform financial and tax due diligence investigations on a carve-out target group in Moscow, Russia.
Our work helped to uncover certain customary offshore activities and unofficial operations being used for tax optimisation purposes. PwC prepared a quality of earnings analysis, which eliminated the effect of tax-optimisation mechanisms (both offshore and in Russian) and took into account estimates for stand-alone revenues and costs. Prior to our adjustments the Target's EBITDA was significant and positive (in excess of 7%). After our quality of earnings adjustments the EBITDA turned negative (-6%).
The tax-optimisation mechanisms provided a significant share of the Target's profitability at the EBITDA level. We were able to provide an indication of the historical business development on a “white basis. Our client had revisited their valuation model.
To the top
6. Do you need a flexible and professional deal advisor to help you with your due diligence and structuring needs?
We initially agreed to carry out standard financial and tax due diligence on a medium sized privately owned German target company for our customer operating in the same industry. The due diligence was kicked-off very quickly coordinating cross-border and cross-specialist teams. Our client took part in the due diligence carried out in German language on site in central Germany.
It very quickly became clear to our experienced deal team that very little thought had been given to the structure of the transaction which would ultimately drive the transaction and due diligence effort. The seller operated under his own name and the transaction necessitated a carve-out of part of those personal business operations.
We gave Day 1 feedback to the client that an optimal deal structure should be developed which gave consideration to the likely views and potential negotiation points of the seller and his family.
Meanwhile, we remained on-site and flexed our approach to facilitate this. During the afternoon of Day 1, our senior tax and financial team carried out a workshop with the buyer and seller in order to help clarify the understandings and stand points of each party. Within five working days from arriving on site we had issued a concise key findings based financial due diligence report and a thorough tax and deal structuring report to our client.
Although the scope of our work and our client’s needs changed throughout the process our flexibility and deal experience enabled us to keep the transaction on track.
To the top
