Maintainable profits
Many transactions are now structured with the purchase price defined as: a multiple of EBITDA, minus net debt, plus or minus an adjustment for net working capital.
In this context it is essential to gain a clear understanding of the “real” or “normalised” level of EBITDA and working capital. Even where the deal is not structured as above, management and/or the investor has almost always created projections for future earnings, and those projections must be built on a firm understanding of present profitability.
How we can assist
In addition to the balance sheet areas noted above (“The search for “black holes””), we would often perform the following income-statement and cash-flow based work:
- Review of key revenue and cost items, explanation of any significant movements in these, review of revenue recognition and year end cut-off procedures, review of margins by product category, review of the impact of any large and unusual transactions on reported profitability, estimation (to the extent practicable given the information available) of “normalised” EBITDA
- Review of working capital levels
Many of the other steps in the section above, such as review of related party transactions, are also relevant to the income statement.
Material on this website is © 2012 Deloitte Global Services Limited, or a member firm of Deloitte Touche Tohmatsu Limited, or one of their affiliates. See Legal for copyright and other legal information.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.