A private equity client was evaluating the acquisition of an HVAC company after the target reported a strong FY25. Based on the company’s historical results, the target initially appeared to be an attractive investment opportunity. However, as part of the diligence process, CFOx performed a Proof of Cash analysis and uncovered a key issue. The company’s strong FY25 performance was largely driven by billing at the end of several large, long-term projects, which artificially inflated revenue and margins.

To address the issue and give the investor a clearer picture of revenue, our Transaction Services team aligned revenue with the periods in which costs were incurred and determined that a portion of the reported FY25 revenue should have been recognized in FY24. This significantly changed the buyer’s view of the company’s recent performance.

The findings became even more important when the client reviewed the company’s backlog and found no comparable large projects in the pipeline. Without a similar volume of future work, the business was unlikely to maintain its historical growth trajectory.

The issue was not simply an accounting adjustment. The target’s valuation was based on financial results that appeared stronger than the underlying economics of the business. Once revenue was aligned to the periods in which the work was performed, the buyer had a more accurate picture of earnings sustainability and future growth prospects. This enabled the investor to evaluate the opportunity based on the company’s true operating performance rather than a temporary boost created by project billing timing.

Ultimately, the Proof of Cash analysis gave the buyer a clearer understanding of the company’s true earnings profile, future outlook, and the risks associated with relying on historical results that were not indicative of ongoing performance. What initially appeared to be a compelling acquisition opportunity required a much different assessment once the underlying revenue trends were understood.

While the Proof of Cash analysis uncovered the key revenue issue, CFOx’s broader diligence work gave the buyer added clarity across the transaction. Through a Quality of Earnings review, Net Working Capital analysis, tax and payroll reconciliations, and other transaction-focused procedures, our team helped the client better understand the target’s financial position and make a more informed investment decision.

This engagement highlights why transaction diligence extends beyond validating reported financial statements. Investors need to understand whether historical earnings are sustainable, how revenue is generated, and whether future performance is likely to support the investment thesis. In this case, a deeper analysis of cash flows and revenue recognition provided critical insight that may not have been apparent from the reported results alone.

If you would like to learn more about our Transaction Services, please reach out via email (info@cfoxadvisory.com) or schedule a call directly on our Contact Us page.

Services Provided:

• Proof of Cash Analysis
• Quality of Earnings (QoE) Analysis
• Due Diligence on Targets