The art and science of due diligence continues to evolve, with advanced analytics taking on a critical role. Using advanced analytics, sellers are doing more to prepare assets for sale, including normalization and pro forma adjustments to reported EBITDA, which are intended to show the business on a full “investment” pro forma basis. Buyers are testing these adjustments with advanced analytics as well, to evaluate adjustments and find additional sources of value.
KPMG conducted a large-scale analysis of accounting and pro forma adjustments leveraging Benchmarking Plus, a proprietary solution which includes more than 1,800 M&A transactions across all industries between 2013 and 2018. We found that seller adjustments are increasing as a percent of reported EBITDA and that the average value of adjustments in individual deals is also rising. The fastest-growing category is accounting adjustments—“housekeeping” adjustments for items such as accounting policy changes, inventory adjustments and out-of-period entries. Pro forma adjustments are also on the rise, both in frequency and value. These include “run-rate” adjustments intended to more accurately reflect how the business is performing by estimating the impact on cash flow of operational changes that have not been reflected in results yet, such as a reduction in force or a new acquisition.
To prepare their adjustments and ensure that they stand up to scrutiny, sellers rely increasingly on advanced analytics. Buyers are running their own models to assess adjustments identified by sellers and using advanced analytics to also find additional value beyond such.
The key take-away from KPMG’s research is that the growing activity around adjustments reflects a new rigor in due diligence. In a highly competitive market, sellers have learned to prepare more thoroughly for the sale process and find ways to demonstrate the true value of their assets. Buyers have become increasingly adept at probing seller adjustments and using analytics to make their own assessments. This process has become part of the deal routine, and it behooves both buyers and sellers to use all the technological advancements they can—or potentially risk overpaying for an asset or losing a fairly priced acquisition.