The Challenge
Enterprise Value
A Private Equity (PE) firm came in as a 50% partner to the client a couple of years ago, investing about $56M in the business.
As a flow-through entity, the year-end cash distributions to the PE and two founder owners put continual pressure on shareholder equity, and at times resulted in a deficit.
The poor optics of the net equity or deficit resulted in concerns from prospective clients and increasingly sophisticated procurement teams, making the company’s competitive job bidding process more challenging – which was negatively impacting the growth opportunities of the company.
The Solution
The CFO discussed the history and current situation with other auditing firms and GAAP experts in his extended network and brainstormed a couple of ideas. The chosen solution was to retroactively implement “Pushdown Accounting”, an optional GAAP treatment that can be implemented retroactively. Pushdown Accounting was then implemented on the date that the PE firm came into the equity. This required a 3-year restatement.
The Implementation
Engaging the PE’s CFO, the company’s independent auditor, as well as a second audit firm in my network or technical guidance, I ran the restatement project on the GAAP financials. A key aspect was communication and collaboration—so the CFO would stay in lockstep with the company’s independent auditor, enabling that firm to promptly issue fresh audits on the restated years.
Additionally, the tax impacts needed to be addressed. The CFO engaged a tax attorney from his network at a large law firm to review the tax opportunity.
The Results
The restatement resulted in a clearing out of the negative equity accounts that existed before the PE investment and a positive $52M in GAAP net equity. This eliminated concerns from client procurement teams resulting in an estimated $25M annually in saved or newly won revenue and $1.5M+ of EBITDA.
The tax attorney got sufficiently comfortable to issue an opinion letter to support amending the tax returns. The tax preparer went back and amended tax returns resulting in about $2M of cash tax savings to the partners.