The Target Company is a direct marketing firm providing online marketing, graphic design, and full-color printing services. Founded in 1998 as a marketing and graphic design practice, the Company moved early into digital printing during the dot-com era, applying emerging technologies to drive commerce well ahead of much of the industry. Supported by a talented and dedicated team, the business has been repeatedly recognized as one of the fastest-growing companies in America.

Fort Dearborn Partners ("FDP") was engaged by a longstanding client (the "Acquirer") to perform buy-side financial due diligence in connection with the proposed acquisition of a target company, valued at approximately $15 million. The engagement was focused on evaluating the quality of earnings, assessing normalized working capital requirements, and identifying transaction-related risks associated with the Target's recent transition from a divisional operating structure to an independent standalone entity.

Historically, Target operated as a division of a larger parent organization that generated more than $3 billion in annual revenue and employed more than 9,000 individuals. Following the divestiture of the broader operating segment, the Parent established Target as a standalone legal entity to isolate certain historical tax exposures and facilitate an eventual sale process. As a result, the business had only recently begun operating independently and remained administratively supported by an unrelated division within the Parent organization. The transaction was therefore driven primarily by the continued separation and monetization of non-core assets rather than by a long-standing standalone operating history.

Our diligence identified several reporting inconsistencies and financial statement adjustments arising from weaknesses in the Target's underlying accounting processes and control environment. Given the relatively small size of the business, financial statements and supporting accounting records had not been subjected to an external audit, increasing the importance of diligence procedures to validate reported results. In addition, the absence of a centralized enterprise resource planning ("ERP") system limited management's ability to produce integrated financial and operational reporting, creating challenges around data consistency and financial transparency.

From a quality-of-earnings perspective, our analysis identified several material EBITDA normalization adjustments necessary to reflect the business's economics on a go-forward basis. Most notably, the historical income statements did not fully capture the cost of personnel and administrative services previously provided by the Parent organization. Accordingly, EBITDA was adjusted to reflect the incremental headcount and associated compensation expense required to support the business as an independent enterprise. We also identified anticipated increases in software licensing, maintenance, and information technology costs that would be incurred post-transaction as the Target transitioned away from Parent-provided systems and infrastructure.

Our net working capital review similarly identified several adjustments required to present the Target's operating assets and liabilities on a normalized basis. These included the establishment of an inventory reserve that had not historically been recorded despite identifiable inventory risk, as well as the recognition of additional accruals for customer rebates, discounts, employee bonuses, and deferred revenue obligations. Collectively, these adjustments highlighted the need to normalize the Target's balance sheet and provided the Acquirer with a more accurate assessment of the working capital investment required to support ongoing operations following closing.

Overall, the diligence process provided the Acquirer with a clearer understanding of the Target's standalone earnings profile, working capital requirements, and operational readiness as an independent company, while also identifying key financial risks and transition-related costs that warranted consideration in transaction valuation and purchase agreement negotiations.

Our diligence ultimately reshaped the economics of the deal. By recalibrating the marketed financials, we brought EBITDA down by roughly 23.7% and net working capital by approximately 5.3%, giving the Acquirer a far clearer view of the business’s true earnings power and capital requirements.

Armed with that analysis, our client moved confidently to the negotiating table and closed the transaction on revised terms that reflected the value we had uncovered.