How Sell-Side Diligence Accelerated a Deal With Revenue Recognition Complexity

Background

A fast-growing infrastructure services company was preparing to sell. The company’s structure included multiple interrelated entities and a complex revenue recognition model involving a percentage-of-completion (POC) accounting component, adding layers of complexity to the transaction. Recognizing the need for financial diligence, the company’s investment banking partner turned to KSM, a firm they had partnered with on prior deals involving similar accounting complexity.

With a nuanced business model and significant buyer interest, the company needed a diligence team that could navigate complex accounting issues, coordinate efficiently with stakeholders, and present the financial story with clarity. KSM was engaged to lead the quality-of-earnings process and help prepare the company for market.

The Challenge

The most pressing challenge was integrating three distinct but interconnected business units, each with its own revenue model, into a cohesive package. The construction arm operated on a POC basis, while the other entities followed deferred revenue models, making unified earnings analysis complex.

Complicating matters, 22 potential acquirers conducted preliminary due diligence. At one point, KSM’s transaction advisory team fielded inquiries from seven separate diligence providers simultaneously – volume that would have been difficult for the internal team to manage alone.

As the transaction neared completion, a discrepancy emerged: The buyer and seller had a significant difference in their net working capital targets. KSM was called upon to validate its original position and equip the client with clear, data-driven support to address and challenge the buyer’s position.

The Solution

KSM delivered comprehensive sell-side diligence and worked with the investment bank to craft a clear, buyer-facing financial narrative. This required nuanced handling of POC and deferred revenue accounting to ensure clean, defensible earnings before interest, tax, depreciation, and amortization (EBITDA).

KSM’s responsiveness proved critical. By managing simultaneous inquiries from multiple diligence teams, the KSM team kept the process on track and allowed the company to remain focused on operations.

When the working capital dispute arose, KSM provided the analysis and rationale needed to reinforce its original position. Armed with this support, the investment bank successfully countered the proposed adjustment, and the buyer reverted to the original working capital target, preserving significant value for the seller.

The Result

Following a competitive sale process, the company achieved a strong valuation. Despite a last-minute competing offer, the sellers chose a buyer who aligned with their goals and could close within the anticipated timeline. KSM’s involvement helped keep the timeline from the letter-of-intent issuance to deal close to just six weeks.

Company leadership noted that KSM’s deliverables were exceptionally well-organized, calling the workbook one of the cleanest they had seen. The CFO continues to consult with KSM on forecasting and operational matters post-close, underscoring the value and trust built through the engagement.

Considering a sale?

KSM’s transaction advisory team delivers the technical precision, responsiveness, and strategic guidance needed to navigate complex deals with confidence. Contact us to learn how we can help position your business for a successful outcome.