Buy side due diligence for manufacturer
Financial due diligence leads to successful price reduction for company acquiring a $50 million manufacturer.
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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
