Buy-Side Due Diligence - Margin Impact of New Manufacturing Agreements

SCENARIO
New manufacturing agreements may impact future gross profit

Private equity firm is looking to purchase a stand-alone privately held consumer products business (“Target”).

Target is in the process of negotiating with new manufacturers to outsource the manufacturing of Target’s products to China, which will significantly impact future gross margins and EBITDA.

APPROACH/ANALYSIS
Data analysis and recasting of historical financials

In addition to analyzing the quality of earnings, quality of assets and working capital, Laurus’ approach included:

• Analyzing historical and new product cost data in the context of the new manufacturing contracts.
• Applying product-level costs as contracted in the new agreements to actual historical volumes of specific products to recast historical financial statements to reflect pro-forma gross profit and EBITDA.
• Summarizing primary financial terms of new agreements.

OUTCOME
Stronger negotiations to obtain transaction financing

The impact of new manufacturing agreements on historical gross profit indicated an increase in gross margin by approximately 600 basis points.  This analysis was instrumental in demonstrating Target’s prospective growth story and assisting our client with obtaining both equity and debt financing for the transaction.

Our written report describing our approach and our conversations with lenders provided additional comfort to the mezzanine firm financing the transaction.

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