DUE DILIGENCE CASE STUDIES

Client:Private Equity Investor & Mezzanine Lender
Company:Manufacturer of Sporting Goods
Revenue:$60,000,000
Equity Investment:$33,200,000
Market Capital:$35,000,000
Existing Loan:$12,000,000
New Capital:$20,000,000
  • Validated the business case for acquisition and privatization of 2 publicly held distributor / manufacturers.
  • Completed diligence on both the acquisition and the acquiring portfolio.
  • Identified non-recurring EBITDA adjustments totaling $2.9 million and EBITDA synergy savings from consolidation of $3.3 million.
  • Determined acquisition integration timing of EBITDA savings.
  • Identified asset-based lending constraints associated with the Company’s foreign inventory purchases.

 

Client:Mezzanine Lender
Company:Container Manufacturer
Revenue:$200,000,000
Equity Investment:$25,000,000
  • Identified understatement in accounts receivable of $400,000.
  • Researched and documented company’s contractual ability to pass-through raw material price increases.
  • Identified differences in GAAP reporting procedures between company and foreign parent.
  • Evaluated standard costing systems and valuation differences between foreign and domestic entities.
  • Commented on due diligence report generated by “Big 4” accounting firm and identified material discrepancies in EBITDA roll-forward computation.
  • Analyzed the impact of the Puerto Rico tax rate on the overall effective U.S. tax rate for “Newco”.

 

Client:Senior & Mezzanine Lenders
Company:Lumber Distributor
Revenue:$92,000,000
Loan Size:$22,000,000
Senior Loan:$6,000,000
Equity:$500,000
  • Determined internal controls to be inadequate, resulting in inaccurate interim financial statements.
  • Discovered an existing senior lien relating to a significant segment of the business and secured by a performance bond. A unique loan structure was required to carve out collateral behind performance bond; otherwise, the existing lien could trump the new senior loan.
  • Generated 3 years of combined income statements for 3 related companies previously not combined.
  • Created a combined, trailing 12 months income statement and EBITDA schedule.
  • Identified inefficient sales bidding process.
  • Determined current controller incapable of assuming role of CFO.
  • Discovered potential risks related to accounting software.

 

Client:Private Equity Investor
Company:Professional Cleaning Services Provider
Revenue:$5,000,000
Equity Investment:$15,000,000
  • Conducted pre- acquisition due diligence on behalf of equity investor.
  • Identified non-recurring EBITDA adjustments totaling $2.3 million.
  • Identified inadequacy of controls over master franchise fee reporting; suggested cost-effective procedures to minimize exposure of underreported franchise income.
  • Identified improper deferred revenue reporting and adjusted earnings in accordance with GAAP.
  • Evaluated proprietary software management system and identified insufficient controls; assessed timing of rollout of future accounting modules.
  • Evaluated the impact of a qualified stock purchase and possible §338 election.

 

Client:Mezzanine Lender
Company:Lumber Distributor
Revenue:$110,000,000
Equity:$23,000,000
Revolver Credit:$6,500,000
Term Loan:$45,000,000
  • Consolidated 3 separately reported companies for current year and 2 previous years. Identified and eliminated intercompany transactions.
  • Re-calculated EBITDA on a consolidated basis.
  • Scheduled the trailing twelve months P&L for 3 companies, created pro-forma adjustments, determined normalizing entries and re-calculated profit sharing contribution.
  • Identified internal control issues related to material amounts of sales and cost of sales allocated to improper periods.
  • Identified other accounting and internal control issues that rendered the interim financial statements unreliable.

 

Client:Senior Lender
Company:Manufacturer and Distributor of Residential and Commercial Doors
Revenue:$124,000,000
Loan Size:$10,000,000
  • Saved company approximately $1,000,000 in tax liability by evaluating the capitalization policy of manufacturing overhead.
  • Identified benefits of integrating inventory and general ledger software packages.
  • Created inventory turnover report to manage purchasing efforts and isolate slow moving products.
  • Assisted management in their search for new outside accountants.

 

Client:Mezzanine Lender
Company:Computer Hardware and Proprietary Software Developer
Revenue:$118,000,000
Equity Investment:$20,000,000
  • Determined accounts receivable reserve understatement of $2,300,000.
  • Surfaced concerns regarding the lack of knowledge and understanding of the company’s business by the financial personnel.
  • Uncovered material internal control weaknesses relating to revenue recognition.
  • Initiated the creation of software programs to capture revenue transactions on a timely and accurate basis.
  • Developed historical accounts receivable write-offs.
  • Identified various service provider partners and locations within the US that had higher than normal rate of accounts receivable write-offs.
  • Created method of estimating bad debt reserve and identifying potential uncollectible accounts receivables.
  • Implemented procedures and timing guidelines to perform monthly “close” and instituted procedures to analyze each balance sheet account.

 

Client:Principal
Company:Fuel Sales & Convenience Store Operator
Revenue:$97,000,000
Loan Size:$7,500,000
  • Conducted financial due diligence to assist with stock acquisition.
  • Ascertained inadequacies of EBITDA “add backs” totaling $600,000.
  • Identified $265,000 of downward adjustments to EBITDA, which resulted in a 38% decrease in the target’s purchase price.
  • Discovered material overstatement in reported inventory balance as much as $38,000.
  • Prepared pro-forma financial statements.
  • Identified purchase price adjustments that would impact cash balance and require reimbursement by the seller.
  • Prepared adjustment schedules to reflect the fair market value of the current lease payments.
  • Assessed competency of the accounting department.

 

PORTFOLIO COMPANY REVIEWS CASE STUDIES

Client:Senior Lender
Company:Kitchen & Bath Textile Products Manufacturer and Distributor
Revenue:$70,000,000
Loan Size:$11,000,000
  • Uncovered “pre-billings” of $1,400,000.
  • Identified $3,300,000 of ineligible inventory on the borrowing base certificate.
  • Detailed a $1,900,000 understatement in accounts receivable reserve.
  • Determined incorrect recording, resulting in cash shortfall of over $1,000,000.

 

Client:Senior Lender
Company:Commercial Printing and Graphic Services
Revenue:$30,000,000
Loan Size:$15,000,000 Term Loan
$3,000,000 Revolver
  • Evaluated borrowing base reports, monitored over-advance use, and identified ineligibles in borrowing base certificates totaling $1,800,000.
  • Implemented a 13-week cash flow forecasting system maintained by management and monitored by B&A.
  • Analyzed and recommended various methods to improve the Company’s cash flow.
  • Assisted management in establishing appropriate internal controls for billing, production and shipping activities.
  • Stabilized information flow and established integrity of data going to the Lender.
  • Reinforced and monitored implementation.

 

Client:Senior Lender
Mezzanine Lender
Company:Meat & Poultry Processor & Distributor
Revenue:$65,000,000
Loan Size:$20,000,000
  • Discovered and identified management personnel responsible for fraudulent reporting in the borrowing base certificate.
  • Created and implemented daily cash management reporting system.
  • Prepared and integrated (i.e., balance sheet, cash flow and P&L) monthly budgeting system and procedures.
  • Established 13-week cash forecasting system and methodology to compare with budgeting system.

 

Client:Mezzanine Lender
Company:Natural Foods Producer & Distributor
Revenue:$40,000,000
Loan Size:$8,000,000
  • Created 13-week cash forecasting system to be used and maintained by management.
  • Assisted management with evaluating viability and ability to service debt.
  • Evaluated benefits of integrating the Company’s three divisions into one computer system.
  • Analyzed the commission policy and structure, and recommended improvements for the Company’s independent sales brokers.
  • Reviewed accounts receivable and accounts payable for trends, potential cash sources, and savings.
  • Identified various methods to improve cash flow.