In a competitive M&A environment, buyers are learning how to use data and proprietary technology to challenge proposed seller adjustments, discover additional value, and build confidence in their bids.
In a recent study, KPMG reviewed more than 1,800 M&A transactions across all industries. “We found that from 2013 to 2018, seller adjustments grew in both number and size,” says Carole Streicher, KPMG International Deal Advisory & Strategy Group Leader in Chicago. “On average, there were 5.8 adjustments per transaction in 2013 and 7.9 in 2018.”
Several important trends emerged from the data:
- Pro forma adjustments can be challenging to confidently support because they often involve predictions of future performance, such as new revenue sources or expected cost savings, and they can have the greatest impact on EBITDA.
- “Housekeeping” accounting adjustments are the fastest-growing category for example accounting policy changes, inventory adjustments, or out-of-period entries.
- Non-cash and transaction-related adjustments are growing rapidly. They include non-cash stock compensation, asset impairments, and costs associated with acquisitions – items that do not affect a company’s ability to generate cash. Therefore, they are generally considered non-confrontational by both buyers and sellers.
- Buyers are not shy about challenging adjustments. Buyers routinely vet seller-proposed adjustments, and successful challenges supported by data-based insights can give buyers the basis to negotiate reductions in the final transaction price.
- Buyers are finding value, too. In the deals in the study, buyers found incremental value amounting to 34.2 percent of reported EBITDA – on top of seller adjustments.
How categories of adjustments grew from 2013 to 2018
“From the buyer’s perspective, the proliferation of seller adjustments is cause for heightened skepticism – and the impetus to do more homework of their own,” says Streicher. Smart buyers are using advanced analytics to make up for information asymmetry in general and to separate best-case scenarios from credible sources of value.
How seller and buyer adjustments affect final EBITDA
The net effect of this activity around adjustments is a subtle but a significant advance in the art and science of due diligence. Sellers are doing more to validate the selling thesis, and buyers are developing a more detailed and objective view of post-deal value potential. Sometimes, in the course of due diligence, buyers even discover sources of value that sellers have not highlighted.
Learn more about the research and how KPMG used machine learning to draw conclusions about the impact of adjustments and how buyers and sellers can leverage advanced analytics in their due diligence process in Part I - Prove it: Show me the money: Using advanced analytics to assess deal value.
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