Due Diligence

Comprehensive Transaction Support for Informed Decision-Making

At Avana Advisors, we provide thorough due diligence services that uncover critical insights to protect your investment and maximize transaction value. Our proven methodologies help buyers make informed decisions and sellers optimize their business value before going to market.

Financial Due Diligence

Objective:
Evaluate the target’s financial health, sustainability of earnings, and key risks to inform purchase price and deal structure.

Key Activities:

Quality of Earnings (QoE) Analysis

Assess the sustainability and accuracy of reported earnings, distinguishing recurring business income from one-off or non-operational items.
Identify and adjust for discontinued operations, extraordinary items, and non-core business activities.
Analyze EBITDA adjustments and their impact on valuation.

Net Working Capital (NWC) Review

Analyze historical and normalized levels of working capital, including receivables, payables, and inventory.
Identify seasonality, unusual trends, and any potential working capital shortfalls or excesses.

Net Debt Analysis

Review all debt and debt-like items, including off-balance-sheet obligations and contingent liabilities.
Validate cash balances and assess the impact of net debt on purchase price.

Cash Flow Analysis

Evaluate historical and projected cash flows, focusing on the company’s ability to generate sustainable free cash flow.
Assess liquidity position and review major cash flow drivers, including capital expenditure and debt service requirements.

Financial Statement Review

Analyze five years of audited and unaudited financial statements, including income statements, balance sheets, and cash flow statements.
Review management letters, auditor reports, and responses to identify any recurring issues or concerns.

Financial Ratios and Benchmarking

Calculate and benchmark key financial ratios (e.g., operating margin, current ratio, debt-to-equity) against industry standards.

Accounting Due Diligence

Objective:
Assess the accuracy, consistency, and transparency of the target’s accounting practices and financial reporting.

Key Activities:

Revenue Analysis
Review revenue recognition policies and ensure compliance with relevant accounting standards.
Analyze revenue by product line, geography, and customer segment to identify concentration risks and growth drivers.
Assess the impact of returns, discounts, and allowances on reported revenue.

Customer Analysis

Evaluate the customer base for concentration risk, stability, and contractual terms.
Analyze top customers’ contribution to revenue and profitability, and review customer churn and retention metrics.
Assess the quality of accounts receivable, including aging, allowance for doubtful accounts, and collection history.

Cost and Margin Analysis

Review cost of goods sold (COGS) by product line and assess gross margin trends.
Evaluate the impact of input costs, pricing strategies, and operational efficiencies on profitability.

Inventory and Fixed Asset Review

Assess inventory valuation methods, turnover rates, and obsolescence reserves.
Review fixed asset registers, depreciation policies, and the condition and useful life of key manufacturing assets.

Accounting Policies and Controls

Review key accounting policies, recent changes, and their impact on reported results.
Assess the effectiveness of internal controls and procedures related to financial reporting.

Budgeting and Forecasting

Analyze historical budgets and forecasts versus actual performance.
Evaluate the reliability of management’s projections and underlying assumptions.

Operational Due Diligence

A. Standalone Cost Model

Objective:
Assess the operational cost (headcount and non-headcount) to operate the business on a standalone basis.

Key Activities:

Headcount & Non-headcount Cost Analysis
Review the current costs to operate the business and understand potential gaps against industry benchmarks. Identify incremental costs related to resources, systems, and processes that may be required and the implication on EBITDA.

B. Operating Model Design

Objective:
Assess how a company’s processes, people, technology, and data interact to deliver its business strategy and changes required on Day 1

Key Activities:

Review and document current state operating model
Review and capture how the company’s processes, systems, people, and technology currently function together to deliver business outcomes. Our assessment will provide a clear baseline understanding of existing capabilities, workflows, and organizational structure, which is essential for designing the future state operating model.

Design future state operating model
Define streamlined processes, updated organizational structures, enabling technologies, and governance. A strategic blueprint of how the organization will operate going forward.

Due Diligence

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