What Do Transaction Advisory Services Do?
Transaction advisory services include advisory services in every significant corporate finance transaction such as mergers, acquisitions, divestitures, restructuring, and other critical financial transactions.
Here is an overview of what transaction advisory services typically do:
Financial Due Diligence
– Conduct a review of the financial statements and accounting records of the target firm to assess the problems and threats.
– Assess earnings verification, modification of current assets and liabilities, liquidity verification, and solvency verification.
– Identify commitments, risks, or other obligations that are not captured in the financial statements
– Make sure that the forecasted revenues, profits and assets are correct to develop the right risk profile
Valuations
– Perform valuation analysis by means of such techniques as DCF, peer group comparisons, etc.
– Develop sophisticated financial structures that assist in determining the actual market value of a firm.
– Provide advisory work in relation to business valuation to help in bargaining and pricing structures.
Deal Structuring
– Explain the most suitable form of the deal and the kind of consideration to employ (cash, stock, earn out, and others).
– Establish frameworks that will ensure the desired accounting and tax results.
– Develop action plans for risk and exposure that have been identified.
Integration Planning
– Perform integration planning to determine the process, system, and organizational changes that may be required after the deal.
– Make numerical estimates of integration costs and benefits to assess the economic rationale of integration.
– Set guidelines for integrating departments, technologies, and business processes.
Operational and IT Due Diligence
– Conduct an organizational assessment of the target regarding its processes, technologies, and other facilities.
– Evaluate the working capital needs, supply chain, infrastructures, and other operational issues.
– Take care of what needs to be addressed in terms of issues/risks/requirements regarding IT system integration.
HR Due Diligence
– Assess the target’s human resources policies and practices and labor relations.
– Outline risks associated with change in control, retention plans, and union deals.
– Establish needs for incorporating compensation and benefits after the acquisition.
Carve-Out Support
– Support the proposal to create a new business unit that can be sold off or demerged.
– Prepare a detailed work plan covering legal entity separation, financial separation, etc.
– Determine materials and fixed and nonrecoverable expenses required for a proper carve-out.
Quality of Earnings Analysis
Typically, during the assessment of the financial data and determination of the fair value during the financial due diligence, the transaction advisors make a quality earnings review.
This involves:
– Adjusting working capital to eliminate distortions.
– Reassessing the company’s revenue recognition policies for potential overaggressive nature.
– Examining specific extraordinary and non-exceptional riders that distort income.
– Detecting the out-of-pattern transactions that are not related to regular operations of the business.
– Fine-tuning EBITDA to create a more stable earnings growth pattern.
By assessing these aspects, advisors can estimate maintainable earnings capability of the business as compared to reported income statement. This assists buyers in determining actual value.
Operational Due Diligence
Transaction advisors evaluate various aspects of the target company’s operations, including:
Supply Chain Review
– Check cost model, supplier’s contracts, risks associated with sourcing.
– Establish harmonization points in procurement and logistics.
Facilities/Infrastructure Evaluation
– Conduct a physical review of manufacturing plants, storage, and tangible assets.
– Check on the condition and adequacy of the available structures to determine the level of utilization of infrastructures.
– Forecast the amount of capital needed to upgrade or expand the establishment.
Working Capital Analysis
– Review parts and factors of working capital.
– Identify potential reductions by reducing DPO, DIO, and DSO.
Customer and Sales Assessment
– Analyze the potential customer base, industry verticals, and sales cycle.
– Consider the possibilities for both cross-selling and up-selling.
The operational due diligence offers vital insights into the functioning of the firm to be acquired concerning risk assessment and value creation.
Developing an Integration Plan
Post-merger integration planning comprises:
Readiness Planning
– Identify short-term modifications to finances, banks, and systems.
– Identify critical actions necessary for the closing of the transaction.
Business Integration Planning
– Specific actions, timeframes for product and service integration, selling strategies.
– Define targets for cross-selling activities, brand change.
Functional Integration Planning
– Stake out a plan for integrating finance, HR, IT, and other departments.
– Address consolidation of address systems, location strategy, job effects.
Cost Synergy Realization Plan
– Determine opportunities for reducing headcount, procurement costs.
– Estimate possible cost reduction with the time frame for each action.
Since transaction advisors analyze and design the process of merging two previously distinct entities, they facilitate the integration and contribute to achieving the expected deal value.
In summary, transaction advisory services perform crucial due diligence, valuation, deal structuring, and integration support roles to enable strategic M&A, corporate restructuring, and divestitures. The complex solutions would allow clients to manage risks associated with a particular deal, reach specific financial goals, and maximize value.
