Nimble, Thorough Response Leads to Successful Transaction

Situation Overview:

The owner of a staffing business had identified a staffing company that he wanted to acquire. The financial records of the target company, which was in bankruptcy, were not auditable and there was evidence of prior fraud. The target was created from the acquisition of more than four separate businesses, increasing the complexity of the transaction. The target company’s records were made available for due diligence for just three days.

Issues:

The staffing company owner asked WBL to review the financial information of the target company to identify any issues that might be relevant to the transaction and give him some comfort on the revenue levels, margins and cash flows being generated by the business. The owner was aware that the compressed timeline would be a challenge for his due diligence providers and accepted the risk that not all issues material to the transaction might be identified. In addition, because of the evidence of fraud within the target company, the prior audit report had been pulled by the auditor. Because of the buyer’s deep knowledge of the industry, he was willing to accept the risks in the hope that he could improve the company he was buying.

Action:

WBL’s due diligence team was able to mobilize and initiate the review immediately. WBL’s team performed a thorough review of the target’s revenue, expenses and margins. The team used source documents and underlying accounting records—bank records, payroll records, general ledgers, etc.—along with creativity to give the buyer the comfort he needed to justify his investment in the target company. WBL was able to model the current cashflow of the target, satisfying the buyer that he could cover the required debt service and generate a return on his investment.

Outcome:

The buyer was able to acquire a distressed company at a discount. The work that WBL performed gave him comfort with the deal and he moved forward with the transaction. He acquired the various businesses and discovered within six months that the results were consistent with the analysis WBL had prepared.