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Operational review for acquisition

January 4, 2016 Case Study 1 min read
Operational review and tax assessment guides EBITDA calculations and purchase price adjustment.

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The client

  • $100 million door component company
  • Building products company; stamping and roll forming metal components for overhead door companies
  • Purchase price based on trailing 12 months (TTM) EBITDA
  • TTM EBITDA higher than historical trend
  • Raw material (steel) prices had risen dramatically during TTM
  • Largest customer in-sourced a major product line effective during nine months of the TTM period

The solution

  • Operational review to test company’s claim of being a low-cost producer
  • To calculate an adjusted, sustainable EBITDA:
  • Downloaded transaction database for the previous three years
  • Calculated portion of TTM profit due to "inventory profit" on rising raw material prices
  • Stripped out sales and product cost of lost sales
  • Using recurring sales only, recalculated revenue and COGS at prior year and current year steel costs to strip out the effect of material cost increases and related price increases to customers
  • Assessed tax opportunities

The benefit

  • Operational review showed efficient, lean manufacturing processes; identified and quantified some modest opportunities for improvement
  • Recurring activity recalculated at current pricing, and steel costs showed higher EBITDA than reported
  • Purchase price was supported by adjusted EBITDA calculations
  • Acquisition lenders satisfied that adjusted EBITDA would support new debt structure
  • More than $1 million tax savings identified through proper structure of transaction

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