BDO in Australia’s Post

Some great insights into the key considerations when assessing the appropriate treatment of deferred revenue as part of net debt vs. working capital within M&A transaction completion mechanisms.

This is an interesting article on a key area of contention in deals.

Great summary of the key considerations regarding the appropriate treatment of deferred revenue in M&A completion mechanisms. As always there are approaches that will favour buyer over seller and vice versa. The key is always to understand all the facts appropriately before agreeing a position or entering into negotiations.

Deferred revenue is a liability that arises when a company receives payment in advance for goods or services that have not yet been delivered or performed. It’s a key area of debate in M&A transactions and is common in industries such as software, media, telecommunications and professional services. In this article, BDO’s experts provide guidance for buyers and sellers on how to consider deferred revenue in M&A transactions, why it is important and the key factors that influence how it is treated. https://lnkd.in/gGJDCiR6 #mergersandacquisitions #deals #transactionservices

Deferred revenue is a liability that arises when a company receives payment in advance for goods or services that have not yet been delivered or performed. It’s a key area of debate in M&A transactions and is common in industries such as software, media, telecommunications and professional services. In this article, BDO’s experts provide guidance for buyers and sellers on how to consider deferred revenue in M&A transactions, why it is important and the key factors that influence how it is treated. https://lnkd.in/g7ZE6JGZ #mergersandacquisitions #deals #transactionservices

Deferred revenue is a liability that arises when a company receives payment in advance for goods or services that have not yet been delivered or performed. It’s a key area of debate in M&A transactions and is common in industries such as software, media, telecommunications and professional services. In this article, BDO’s experts provide guidance for buyers and sellers on how to consider deferred revenue in M&A transactions, why it is important and the key factors that influence how it is treated.  #mergersandacquisitions #deals #transactionservices

Part 2 of my series is on why trade credit ratings matter for PE funds and their portfolio companies. They tend to stricture their acquisitions in a certain way that can be challenging for the CRA's to provide strong ratings and limits for them.......... https://lnkd.in/e5_FmSTG

Working Capital is an important and confusing element of M&A deals, which all too often is overlooked by sellers and can result in a real impact on seller proceeds. If you are a business owner looking to sell, read on to learn why it should be area of focus and the components to consider if you are on a sale journey. https://lnkd.in/g3SjTrEy #exitonyourterms #legacymatters #mergersandacquisitions #workingcapital

In M&A transactions, understanding key #financial #metrics is key for evaluating the viability and potential of a target company. Here’s how some of the most important cash flow and valuation concepts are applied in the #mergerandacquisitions process: 📊 Operating Cash Flow to Sales Ratio: Assesses the efficiency of a target company’s operations by comparing cash generated from operations to its revenue. A higher ratio indicates strong operational efficiency, making the company more attractive in M&A deals. ⏳ Cash Conversion Cycle (CCC): Measures how quickly a company converts its investments in inventory and other resources into cash flows from sales. A shorter CCC means faster liquidity, which is crucial for evaluating the target's working capital needs. 💰 Discounted Cash Flow (DCF): A valuation method used to estimate the value of a company based on its future cash flows, discounted to present value. It’s a fundamental tool in M&A for determining the fair value of a target company. 🔄 Operating Cash Flow (OCF): Indicates the cash generated by a company’s normal business operations. In M&A, strong OCF suggests the company can sustain its operations and growth without needing additional financing. 🚀 Free Cash Flow (FCF): Represents the cash a company generates after accounting for capital expenditures. FCF is crucial in M&A, as it shows the cash available for debt repayment, dividends, or reinvestment, reflecting the company’s financial flexibility. 💸 Payback Period: The time it takes for an investment to generate an amount of cash flow equal to the cost of the investment. In M&A, a shorter payback period is preferred as it indicates quicker returns on the acquisition. 💵 Net Cash Flow: The difference between a company’s cash inflows and outflows over a period. Positive net cash flow in M&A suggests the target company has sufficient cash to support its operations and future growth. 📉 Present Value: The current value of future cash flows, discounted at the appropriate discount rate. It’s used in M&A to determine how much future cash flows are worth in today’s terms, helping assess the value of the target. 📈 Future Value: The value of an investment at a specific date in the future, considering a specified rate of return. It helps in M&A to project the growth potential and future earnings of the target company. 🏦 Cash Ratio: Measures a company’s liquidity by comparing its cash and cash equivalents to its current liabilities. In M&A, a high cash ratio indicates the target has sufficient liquidity to meet short-term obligations, reducing financial risk. 🔥 Cash Burn: The rate at which a company uses up its cash reserves. In M&A, understanding the target’s cash burn rate is essential, especially for startups, to assess how long they can operate before needing additional funding. infographic by Nevena Miskovic

Financial Due Diligence in M&A: A Critical Foundation of Successful Deals (Post 2/3) Continuing from our previous post on revenue sustainability and earnings quality, let's explore other critical aspects of financial due diligence in M&A: 3) Quality of Balance Sheet ➜ Property Plant & Equipment: - Differentiate between growth capex vs maintenance capex - If the company has spent more on maintenance than growth, it might indicate that its equipment is ageing and could be a bottleneck in achieving future business projections ➜ Related Party balances:  - Identify whether balances are operational (e.g., payments for services, purchases etc.) or funding-related (e.g., intercompany loans, shareholder funding) - If operational, assess if the transactions are on an arm-length basis. Companies sometimes use related-party transactions to artificially inflate revenue and profitability - If funding, whether the borrowing costs are fair or if the company is paying above-market rates ➜ Identify Non-Core or Non-Operational assets: - Often, shareholders may have acquired assets/investments not integral to the business but are still held in the company’s books - Similarly, some verticals or businesses have been shut down but still remain on the books - Assess whether these assets should be carved out of the transaction and no potential liabilities associated with these non-core assets are left with the company, as they could pose financial risk post-transaction ➜ Adequacy of Provisions/ Reserves: - In companies with high employee turnover, ensure reserves for employee benefits, severance, gratuities etc. are adequately booked - Provisions for receivables should follow IFRS 9. If internal policies are used, ensure the provisions are adequate. Write off long overdue receivables, and assess any collection delays ➜ Assess business depends on external funding/Borrowing: - Examine the company’s debt structure, terms, and covenants. For eg., a business with a high level of debt with strict covenants, could be at risk of default - Review the history of refinancing or restructuring, any covenant breaches that could indicate financial instability Next post will be on working capital and net debt adjustment. #Merger #acquisitions #financialduediligence