Client Profile
A senior secured debt fund that provides tailored liquidity solutions to growth-focused businesses across the globe. The fund offers Bridge Financing, Trade Finance, Working Capital, and Domestic/Export/Import Financing, with a portfolio spanning a diverse set of industries.
The Client planned to extend two separate term facilities: one secured by the Buyer’s collateral and free cash flows, and another dedicated to financing the acquisition of the Target.
Parties Involved
- Buyer: A Europe-headquartered global cybersecurity company specializing in large-scale digital identity ecosystems.
- Target: A U.S.-based global certification authority focused on authenticating and securing devices, websites, individuals, and documents for government agencies and enterprise clients.
Situation
Several operational and reporting complexities arose during the engagement due to disjointed financial infrastructure and incomplete supporting data:
- Manual Consolidation Across Entities: The Target manually consolidated its financials based on trial balances submitted from international subsidiaries. These were generated from disparate accounting systems with no universal chart of accounts, resulting in reporting inconsistencies and potential consolidation errors.
- Lack of Standardized Reporting: With each subsidiary operating independently and without aligned financial frameworks, consolidated results lacked transparency, making it difficult to assess historical trends and operational performance.
- Data Limitations: Several key diligence procedures—such as cash proofing, customer trend analysis, revenue cut-off testing, and payroll/headcount reviews—could not be completed due to insufficient documentation and limited internal reporting.
- Infrequent Financial Closes: The Buyer operated on a semi-annual financial close cycle. Since the engagement was conducted on a trailing twelve-month basis, this created gaps in available data and limited the accuracy of interim period analysis.
Solution
Despite the structural and data limitations encountered, we provided the Client with a comprehensive financial picture supported by targeted adjustments and risk mitigation strategies:
- Customer Concentration Risks
At the Buyer level, significant reliance on a small group of top customers was identified. RedRidge recommended that the Client implement ongoing monitoring of key customer contracts and renewal timelines, as the loss of any major customer could materially impact the Buyer’s financial viability. - Collateral Review
Despite incomplete data, a review of both Buyer and Target financials was conducted to evaluate collateral support for the term facilities. Key risks—particularly related to concentration and data reliability—were flagged for further diligence or post-close monitoring. - Process Recommendations
Due to the fragmented consolidation process at the Target, we advised that post-close integration should prioritize implementing consistent accounting policies, aligning charts of accounts across subsidiaries, and automating consolidation to reduce error risk and improve reporting transparency.
Outcome & Impact
Our analysis gave the Client a high-confidence understanding of both the quality and risks of the Buyer’s and Target’s financial profiles. The engagement supported:
- More accurate deal structuring through normalized EBITDA and thoughtful adjustments to reflect actual operating conditions.
- Enhanced visibility into post-close integration issues related to accounting systems and reporting consistency.
- Clear action items for ongoing risk monitoring, especially around customer concentration, operational inefficiencies, and data integrity.
- Client’s decision to move forward with lending under terms that appropriately reflected the identified risks and performance normalization adjustments.
Value Delivered
- Delivered a credible, lender-ready quality of earnings analysis for two businesses with complex reporting environments.
- Identified and quantified customer concentration risk at the Buyer level, providing actionable recommendations to mitigate future exposure.
- Normalized EBITDA to reflect true recurring earnings, adjusted for both overstatements and understatements.
- Offered specific post-close integration recommendations around consolidation practices and financial reporting consistency.
- Equipped the Client with a risk-aware, data-backed foundation to structure financing with confidence.
