Client Profile
A U.S.-based beverage manufacturer and distributor acquired by a Canadian publicly traded company. The acquisition target was to be rolled into the buyer’s existing $400 million revolving line of credit structure.
Engagement Overview
Our firm was engaged by the lender to conduct a comprehensive collateral field exam as part of the acquisition diligence process. The target entity had not been subject to prior borrowing base compliance or third-party reporting and required significant onboarding to meet lender expectations.
Scope of Work
We conducted a detailed review of the target’s collateral reporting framework and operational practices, with a focus on improving transparency and lender readiness. Our work included:
- Accounts Receivable & Chargebacks: We tested A/R invoices and associated credit memos and identified recurring customer chargebacks not previously captured in reserves. Based on this testing, we recommended and developed a chargeback reserve to accurately reflect collectability risk.
- Inventory Reconciliation & Reporting Gap: We identified that nearly 80% of the inventory balance was manually tracked, creating substantial risk. We collaborated with management to improve inventory tracking and reporting processes.
- Geographically Dispersed Inventory: Inventory was held across more than 100 warehouse and distribution locations, presenting visibility and ownership risks. We validated the location-level reporting and implemented controls to ensure alignment with borrowing base eligibility.
- In-Transit Inventory – Domestic & International: The company maintained a high volume of in-transit goods, both inbound from overseas vendors and outbound to large retail customers. We conducted a detailed review of ownership terms and logistics to ensure accurate treatment in the borrowing base.
- Bill and Hold Arrangements: We reviewed and assessed the legal and operational validity of bill-and-hold agreements with key customers to confirm revenue recognition and inventory ownership timing.
- Borrowing Base Readiness: We guided the target company through its first exposure to borrowing base reporting requirements, helping establish lender-compliant processes, documentation standards, and reporting expectations.
Outcome & Impact
Our efforts positioned the target company for successful integration into the buyer’s existing credit facility. Key improvements included:
- Formalized chargeback reserve and A/R reporting framework
- Enhanced inventory visibility across 100+ sites
- Accurate valuation and tracking of in-transit inventory
- Reporting structure aligned with lender’s field exam expectations for the go-forward facility
Value Delivered
- Improved collateral transparency and accuracy during a critical acquisition
- Reduced risk for the lender by addressing manual reporting issues before facility integration
- Enabled seamless onboarding of the acquired entity into a $400MM RLOC
- Strengthened internal controls for future borrowing base compliance
