The Company is a leading supplier of bulk commodities and ingredients serving customers across the retail, bakery foodservice, and industrial food manufacturing segments, with its core customer base concentrated in Ontario and extending across other regions of Canada. Within its primary market, the business holds a leadership position in bakery-related products in Ontario, reflecting established customer relationships and meaningful market presence. In addition to its core product offering, the Company provides value-added third-party logistics and managed inventory services, which enhance customer integration and support recurring demand across its end markets.

Fort Dearborn Partners ("FDP") was engaged in June 2023 by a strategic acquirer to perform buy-side financial due diligence in connection with the proposed two-step acquisition of a Canadian distributor of food commodities and specialty ingredients serving food manufacturers across North America. The Target generated approximately $40 million in annual revenue and operated from a distribution facility located in Ontario, Canada.

The engagement was designed to provide the Acquirer with an independent assessment of the Target's historical financial performance, earnings quality, working capital requirements, and overall financial reporting integrity. As part of our review, FDP conducted a comprehensive quality-of-earnings analysis covering the period from December 31, 2020 through August 31, 2023, including an evaluation of management's proposed adjustments and the Acquirer's anticipated post-acquisition adjustments. In addition, we assessed the Target's normalized net working capital requirements based on the trailing twelve months ended August 31, 2023. We performed detailed proof-of-cash procedures to validate reported revenues and expenses by reconciling trial balances to monthly bank statements.

Our diligence identified several matters that warranted consideration in the transaction valuation and purchase agreement negotiations. Most notably, we determined that the Target had recognized certain revenue transactions in a manner inconsistent with Canadian Accounting Standards for Private Enterprises ("ASPE"), resulting in the overstatement of reported revenue and earnings during the historical review period. Through our analysis, we quantified the impact of these items and adjusted EBITDA to more accurately reflect the Target's sustainable operating performance.

The review also identified recurring non-business and discretionary expenditures embedded in operating results that were not reflective of the business's ongoing economics. Appropriate normalization adjustments were made to isolate the earnings power of the core operations and provide the Acquirer with a clearer understanding of the Target's true profitability.

Beyond the quality-of-earnings analysis, FDP identified potential tax-related exposures and other contingent obligations that may not have been fully reflected on the Target's balance sheet. To mitigate these risks, we recommended establishing an escrow arrangement as part of the transaction structure to protect against potential tax return liabilities and other off-balance-sheet obligations that could arise following closing.

Finally, our review highlighted opportunities to strengthen the Target's financial reporting and control environment. FDP recommended implementing enhanced accounting policies, internal controls, and financial reporting procedures to improve transparency, reduce compliance risk, and support the business's continued growth under new ownership.

Overall, our diligence provided the Acquirer with a comprehensive assessment of the Target's earnings quality, working capital profile, and financial reporting practices, while identifying key transaction risks and structural protections necessary to support an informed investment decision.

FDP's diligence findings provided the Acquirer with critical insight into the Target's underlying earnings quality, financial reporting practices, and potential contingent liabilities. Leveraging the issues identified during our review—including revenue recognition concerns, normalization adjustments, and potential balance sheet exposures—the Acquirer was able to renegotiate key economic terms of the transaction and ultimately secure a purchase price reduction of more than $5 million relative to the seller's initial expectations.

In addition to supporting valuation negotiations, FDP's analysis helped the Acquirer structure appropriate protections within the purchase agreement to address identified risks and facilitate a successful closing. As a result, the transaction was completed on favorable terms, providing the Acquirer with enhanced visibility into the Target's financial performance while mitigating potential post-closing liabilities and integration risks.