Deal Terms

A mid-sized print manufacturer with $5,700,000 annual revenue and $2,000,000 EBITDA was being acquired by our client.

The acquiring team required a thorough quality of earnings (QoE) review to ensure financial transparency, validate operational assumptions, and address discrepancies impacting valuation.

The objective was to negotiate a fair purchase price while setting up the business for a successful post-acquisition transition.

The financing structure of the $11 enterprise value purchase would be a mix of:

• SBA financing
• Buyer personal equity
• Investor equity
• Minority seller equity rollover.

Our client utilized the QoE to present the company's financial prospects to it's bank and investors. 

Key Findings

The Quality of Earnings process revealed various findings that impacted the deal:

• • Revenue trends: Our analysis of revenue over time showed that the trailing twelve months performance lagged 2023 significantly. We were able to show that the decline was from a decrease in total customers, while average order values stayed steady.
  • Non-operational income removed from EBITDA: Non-operating income from interest income, capital gains, PPP income, and fixed asset sales were all removed during our diligence to get a true view of operational earnings.
  • Owner related expenses: Various addbacks related to discretionary owner compensation and expenses were validated.
  • Bonuses and 401(k) plan: The seller reported addbacks for excess compensation from their annual bonus plan and 401(k) plan. Our analysis showed that employees would not deem the removal of these bonus plans as acceptable, and therefore we did not validate this as an EBITDA adjustment.
  • Identified redundant roles in marketing and bookkeeping: with plans to replace these with cost-effective alternatives like offshore virtual assistants and third-party bookkeeping services
  • Working Capital: Addressed complexities around working capital adjustments, including the treatment of deposits and liabilities such as profit sharing and sales tax.
  • Debt-like items: Identification of potential debt-like items were identified such as historical sales tax liabilities as well as the pro-rated portion of year end bonuses that the seller would have to reimburse to the buyer.

The Deal Outcome

Our client concluded their financial diligence with actionable insights to help them complete their transaction.

• Purchase Price Adjustments: The decline in the run rate of earnings gave the buyer evidence of a required purchase price adjustment.
• Buyer Compensation Structure: The analysis of adjusted earnings for the TTM period showed that the buyer's anticipated compensation structure would have to be adjusted to adequately suit the bank's and investors requirements
• Cost-Effective Operational Strategies: The buyer developed a plan to transition redundant roles and optimize the bonus structure while maintaining employee satisfaction.
• Post-closing roadmap: The buyer gained conviction in their plan to revamp the marketing strategy for the business to bolster revenue after closing.