How PBO Advisory’s financial due diligence uncovered the truth behind the numbers, giving a buyer the confidence to close and a lender the clarity to approve.
Introduction
A private investor identified a promising acquisition target: an owner-operated business in Hawaii. An offer was made, but the deal was contingent on one critical factor—the lender needed to gain confidence in the company’s financial reports. The buyer needed to validate the analytics driving the purchase price, understand the company’s actual, normalized earnings, and secure financing. To assess the financial risk and finalize the deal, they engaged PBO Advisory Group.
The Challenge: Unaudited Financials and Hidden Truths
The target company was managed by the owner, with a bookkeeper handling most accounting functions. The financial reports were unaudited and, as the initial due diligence progressed, it became clear they were not compliant with US GAAP (Generally Accepted Accounting Principles).
This created several significant hurdles:
- Lack of Credibility: The initial financial statements could not be trusted, making it impossible for the buyer to verify the seller’s claims about profitability.
- Financing at Risk: Without a clear and accurate picture of the company’s financial health, the lender would not approve the loan required to close the deal.
- Hidden Liabilities: The buyer suspected that personal expenses and other non-recurring activities were distorting the company’s performance, but they couldn’t quantify the impact.
The deal was at a standstill. To move forward, all parties needed a definitive, third-party analysis of the company’s real financial position.
The Solution: A Comprehensive Quality of Earnings Engagement
PBO Advisory was hired to conduct a thorough financial due diligence and deliver a Quality of Earnings (QoE) report. The objective was to provide a single source of truth that both the buyer and the lender could rely on.
Our team was tasked with:
- Analyzing Normalized Earnings: We investigated the company’s accounting database to identify system issues causing reporting errors and corrected them.
- Validating Adjustments to EBITDA: Our team distinguished between legitimate recurring business revenue and non-recurring or personal expenses that were misrepresenting the company’s performance.
- Assessing Financial Health: We conducted a thorough analysis of net working capital, customer concentration, and cash flow to create a comprehensive and accurate picture of the business.
The Result: A Renegotiated Deal and a Confident Close
PBO Advisory delivered a comprehensive QoE report that provided a clear, fact-based assessment of the business, identifying material issues and quantifying personal expenses that had inflated the company’s perceived financial performance. Armed with this new information, the PBO team met with the lender, the seller, and our client, where the report’s recommendation to reduce the original purchase price became the path forward. This led to a successful renegotiation of the deal at a more accurate and appropriate valuation. With the credible QoE report in hand, the lender gained the confidence needed to approve the loan, and ultimately, the investor closed on the acquisition and is now working with PBO to implement their vision for the new venture.
As the client stated, “I read through the report and you guys did a great job! I really appreciate it.”
This case illustrates how a comprehensive Quality of Earnings report can provide vital clarity to a transaction, protect buyers from overpaying, and establish the credibility necessary to secure financing and successfully close the deal.
Your Partner in Transactional Clarity
Whether you are buying or selling, understanding a business’s true financial health is critical. A professional Quality of Earnings report from PBO Advisory can provide the clarity and confidence needed to navigate complex negotiations and secure a successful outcome.
Contact Us Today to learn how our financial due diligence services can de-risk your next transaction.
Learn More
