CFOx recently completed an engagement with a Denver-based private investment firm looking to acquire a multi-location counseling and mental health company in Seattle, Washington.

Through a Quality of Earnings analysis, CFOx evaluated the sustainability of the company’s earnings and identified adjustments that reduced normalized EBITDA to approximately 55% of the amount communicated prior to diligence. These adjustments provided the buyer with a more accurate view of the company’s normalized operating performance and the earnings it could expect following the acquisition.

CFOx also performed a Quality of Revenue analysis to assess the accuracy, sustainability, and underlying drivers of the target’s revenue. As part of the analysis, revenue was converted from the historical cash basis to an accrual basis to provide a more accurate view of operating performance. Our team evaluated revenue recognition practices, timing differences between services provided and cash collections, reimbursement trends, and collectability considerations. This work helped identify sustainable revenue streams and provided the buyer with greater visibility into the company’s normalized revenue profile. This work helped distinguish dependable revenue streams from revenue that may not continue under new ownership.

Together, the Quality of Earnings and supporting Quality of Revenue analyses gave the buyer a clearer understanding of the target’s true financial performance. The findings helped inform valuation, purchase-price negotiations, and post-close planning by showing how the company’s normalized earnings differed from the originally reported results.

The team also performed a proof of cash analysis and reconciled the target’s payroll records to assess whether the reported balances were accurate and adequately supported. This analysis identified discrepancies and provided the buyer with greater clarity of the company’s cash flow activity and outstanding obligations.

With a clearer understanding of the target’s normalized earnings and revenue quality, the client was able to evaluate the investment opportunity based on a more accurate view of the company’s financial performance. The client decided not to proceed with the acquisition and instead redirect its capital toward other opportunities.

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:

• Quality of Earnings
• Quality of Revenue
• Net Working Capital and Net Debt Analysis