Financial Due
Diligence Services:
Specialized Team
for M&A Transactions
Horizen
Transaction
Services
If you are looking to invest in or buy-out a company and want a high quality review of the target’s financial situation prepared by seasoned professionals who understand the in and out of the online subscription model, we’re the perfect advisors for you.
At HoriZen Transaction Service, we are the team where Big 4 financial due diligence expertise meets business operational and advisory expertise. Because business and financial advisory are what we do all day.
We’ve also built the course about financial due diligence and how to perform a quality of earnings (QofE) analysis.
Depending on your needs, existing level of comfort and how extensive you’d like your financial due diligence report to be, we offer two FDD package pricing options.
High Level
Company Red Flag Report.
High level presentation of P&L, Balance Sheet and operation metrics
Review of target main sources of financial information
Descriptions of the different points of attention we recommend you to dig further and sort out with seller
List of items with the potential to be quality of earning adjustments and may impact the value of the deal
Comprehensive
Comprehensive company financial
due diligence report.
Personalized quote on request
Detailed review of P&L, balance sheet and cash flow
Quality of earnings
In depth review of historical revenue and profit trends
Quality of net debt
Normalized net working capital analysis
Budget accuracy and assessment of forecast
Review of accounting principles used and their impact on financials
Direct call sessions with target’s Management
Reconciliation of different sources of information provided
Review of accounting principles used and their impact on financials
Check of cash position vs. bank statements
How Do We
Bring You Value
Get a comprehensive report on the financial health of the company under review
Understand historical business value drivers and shortfalls
Get an accurate picture of the business and operation metrics before investing
Deleverage your risk by identifying potential issues upfront
Get an assessment of the achievability of the team’s forecast
Base your valuation on adjusted and more reliable numbers
Spot any recent change in the businesses historical and recent trend that can impact the transaction
Use our quality of earnings, net debt, cash flow and net working capital adjustments as part of your negotiation with buyer
How Long
Does a
Report Take?
If an investor is looking to buy a company, they’ll want to identify where the strengths and differentiating features lie to better understand whether the target is a good acquisition.
For a red flag report, we generally expect a 10 day turnaround from the moment we receive the information and documents.
For a full report on a sub-$10m business, it will usually take 3 to 4 weeks to complete all the checks and analyses, assuming that we receive documents and answers from Management in a timely manner.
Process and
Diligence Checklist
Each financial due diligence is different and tailored to the specific business we review, however here are what a general due diligence roadmap and diligence checklist look like in a simplified way.
1.
We discuss your current understanding of the business, specific problematic you’d like to better explore and what areas of the transaction are most important to you. This helps us define the most efficient scope of work to answer your questions.
2.
We send an extensive request list to the target, asking for financials, operation metrics, business presentation and documents that will allow us to kick-off our process.
3.
After a first review of all the documents, we’ll organize a call with Management to confirm our understanding of the information provided and ask detailed questions about the nature of key accounts, historical and recent trends, accounting principles, internal processes and forecasting methodology.
4.
Next on our financial due diligence checklist, we put together a full report based on all the information received that offers a clear and articulated view of the business operations and profitability profile. We will generally request one or two additional calls with management to sort out and answer questions that arise from our in-depth review of the numbers.
5.
We finalize our process by sharing live our insights with you and highlight potential red flags.
Usual FDD Process
Every process is different, however based on our experience, here would be a description of a “typical” project.
1. Pre-Assignment
Preparation
5. Gathering of Fidings
From Other
Engagement Streans
9. Completion of report
– First Draft and
Review From Partner
2. Information and
Document Gathering
6. Report Writing
10. Report shared With
Clients and Feedback
processed
3. Exploratory
Analysis Phase
7. Additional Live
Management Q&A
Sessions
4. 1 Management Q&A
8. Advanced analyses &
Report Structuring
The Importance of
Financial Due Diligence
Financial due diligence is the process in which you review and professionally assess all the different parts of a business that can have an impact on its future success or potentially jeopardize a deal.
During a financial due diligence process you will want to do an in-depth review of the team, the product, the technology, the financials but also to check the conformity of the target’s business operations from a legal and a tax point of view.
Financial due diligence in particular is the process in which you assess in details the accuracy of the financial information provided by a target company and the solidity of their business and financial performance and operation metrics.
It is key to go through this process before investing. This will ensure that you perfectly understand the financial stability of the business and significantly reduce your risk of bad surprises post-acquisition.
Quality of earnings and understanding of net debt in particular are key to assess the normative level of profitability of a business and agree on price adjustment to bridge from enterprise value to equity value at closing.
Our Speciality Is
Financial Due Diligence
The online business model is very specific, and not fully understood by everyone, not even seasoned advisors. Understanding the specificities of the online business model helps us be more efficient, more relevant and to ask the right questions.
Also, since we know what we are talking about, the dialogue with the seller is always better as they recognize and appreciate our knowledge, technical expertise and understanding of their business.
Being specialists and having business operators on our team, we understand the importance of key metrics including all the key areas any company and PE funds or family offices investing in companies are interested in.
Real life example of
a Transaction
HoriZen Transaction Service team members worked on hundreds of transactions combined.
On one noticeable transaction, the company P&L was prepared on a cash basis (as opposed to on an accrual basis), which meant that revenue was recorded in the book for the full amount of when the subscription payment was received in the company’s bank account.
The company under review was allegedly doing well and was showcasing an increase in total revenue vs. previous year, and the asking price was a multiple of last twelve months revenue.
However after analyzing the top line in more details, it appeared that more and more existing monthly customers were switching to annual subscription.
It meant that for these customers the last twelve months financial results included more than 12 months of revenue (the X months they had been monthly customers + the full amount of their annual subscription).
The above finding meant that the price of the company would need to be revised by at least 15%, but also that the trend and growth profile of the company was not as attractive as it originally seemed.
With SaaS valuation being often tied to revenue and revenue growth, this significantly impacted the dynamic of the deal.
FDD
Report
The report will obviously be read by the potential buyer, but it may be shared to other parties. Here is a quick overview of who can use a FDD report and how they would use it.
Buyer, to prepare their own forecast and refine their valuation of a Target company.
Board of directors to agree on the details of a Transaction
Banks, to agree on a certain amount of financing
A FDD report by trusted advisors may also weight in the negotiations by providing an expert eye on technical points
HoriZen Team
Structure
Typical FDD Report Structure
Next Steps
to Kick-off
Do you still have questions on how to effectively approach your deal and your transaction?
We always welcome a request for a call. If you’d like to speak directly with us, please feel free to book a time with Pierre-Alexandre Heurtebize at your earliest convenience.
Pierre is a director at HoriZen Transaction and M&A services, ex-Transaction Service consultant at PwC, EKEM Partners community fellow and creator of the Financial Due Diligence online course and regularly writes technical articles published on specialised websites like Techcrunch or Toptal.
You can read his Techcrunch article on Quality of earnings or his article on how to prepare a cash flow statement.