Show me the money! Use of M&A adjustments is on the rise

As the M&A market evolves, more and more parties are using adjustments to boost the value of companies up for sale, according to a report from KPMG.

Ten years ago, M&A deals rarely featured adjustments. Buyers would show up to processes and conduct their own due diligence, said Joe Hartman, co-head of the private equity practice within KPMG’s deal advisory and strategy group. Sellers back then would typically provide audited financials of their companies.

This has changed. Sellers are doing more to prepare assets for sale and demonstrate the value they see in their businesses. This has led to the rise of seller adjustments, which has emerged as the new normal in M&A, KPMG said in the report “Prove it: Show Me the Money.”

KPMG reviewed 1,800 M&A deals across all industries between 2013 to 2018. The firm found that, on average, there were 7.9 adjustments per deal in 2018, up from 5.8 per transaction in 2013. The combined average value of these adjustments rose to about 132.8 percent of reported Ebitda, from 119.6 percent.

Pro forma adjustments are some of the most popular. Because they can involve predictions of future performance, including new revenue sources or expected cost savings, pro forma adjustments can be hard to justify. They can also have a huge impact, positive or negative, on Ebitda. Negative pro forma adjustments can include losing a major customer, a price change or a union contract, Hartman said.

More than half of the deals KPMG looked at, or 62.7 percent, had pro forma adjustments in 2018. This is up from 56.9 percent in 2013, KPMG said. “We expect their use to continue,” Hartman said. “We expect a majority of deals to have some sort of pro forma adjustments.”

Parties now come to M&A processes armed with information prepared by firms like KPMG. These reports help buyers vet seller-proposed adjustments, Hartman said. “They’re hiring firms like us to do pre-diligence, so that they know what the cash flow of an asset is, the upside and downside of an asset. They are going in prepared now. The numbers are a little cleaner,” he said.

This pre-work is a major factor why adjustments are increasing, Hartman said. It can also be confrontational, he said. Harman recommends that parties use analytics to back up any sort of adjustments.

“Adjustments, no matter what they are, the foundation has to be deep analytics that allows the buyer to evaluate the credibility of the numbers put forward. If it’s not supported by analytics, the buyer will likely challenge.”

Action Item: For more information, contact Hartman at (312) 665-2489 or email him here.