Buy side due diligence for manufacturer

The challenge

• Target was located on the west coast and outsourced all production to China
• Customers included large national and foreign chain stores
• Purchase price was based on forecast
• Target proposed several EBITDA adjustments

The solution

• Completed financial due diligence
• Performed cut-off testing on accounts receivable and payable
• Performed lower of cost or market testing and slow-moving obsolete testing on inventory
• Analyzed working capital trends to assist the Buyer in establishing a benchmark

The benefit

• Discovered several exceptions to GAAP that materially changed the financial statements
• Identified 20 percent of the inventory had not sold in the past 12 months
• Buyer negotiated a post-LOI purchase price reduction based on the rejection of several proposed adjustments as well as additional adjustments discovered during due diligence
• Established a target working capital based on trailing six months due to the recent growth of the business and holiday ramp up