Client Profile
A life insurance company serving over 100,000 members across more than 30 states. The organization is mission-driven, focused on providing financial security for its members while supporting local communities through fraternal outreach programs.
Target Business
A specialized actuarial consulting firm delivering actuarial, compliance, and software services to life and health insurance companies, fraternal organizations, and regulatory agencies.
Situation
We were engaged to conduct a Quality of Earnings review in connection with the Client’s contemplated acquisition of the Target. The analysis was designed to assess the sustainability and quality of earnings amid the following complexities:
- Limited System Reporting Capabilities: The Target’s billable time tracking system lacked sufficient detail, creating delays and obstacles in isolating service-level data to support recorded revenues.
- Variability in Billable Rates: Frequent changes in hourly billing rates across service lines and clients complicated the analysis of revenue trends and billable hour composition.
- Recent Revenue Decline: A notable decline in revenues was observed from the prior fiscal year to the most recent trailing-twelve-month period. Management attributed this to fewer compliance projects and the cyclical nature of service demand within the actuarial industry.
Solution
Detailed financial and operational analyses were performed to normalize earnings and assess client concentration and revenue durability:
- Adjusted EBITDA Normalization: Increased adjusted EBITDA to reflect the removal of owner-related compensation and equity distributions inappropriately recorded as operating expenses.
- Client Concentration and Transition Risk: Identified that nine of the ten largest customers—representing over 50% of trailing-twelve-month revenue—were long-standing clients for whom the Target served as appointed actuary. While this underscored the strength of customer relationships, we recommended the Client evaluate the potential for attrition following the owner’s departure.
- Customer and Revenue Risk Analysis: Analyzed the revenue decline and confirmed management’s assertion that it was primarily driven by a reduction in compliance-related engagements and natural industry cycles. Further diligence was advised with key customers and recommendation that the Client consider the possible revenue impact on similarly situated clients post-acquisition due to changes in ownership structure.
Outcome & Impact
The Client was provided with clear visibility into the quality and sustainability of Target’s earnings, enabling informed transaction decisions:
- Delivered a normalized earnings view that accounted for ownership-related adjustments.
- Provided insight into potential customer retention risks and revenue volatility.
- Identified areas requiring additional customer diligence and legal consideration prior to transaction close.
Value Delivered
- Provided the Client with a clear financial assessment of the Target’s earnings power and revenue risks.
- Equipped the Client with strategic recommendations to guide final deal terms, integration planning, and customer transition strategies.
- Strengthened the Client’s negotiation position by surfacing key diligence findings related to customer concentration, owner dependency, and billing structure complexity.
