FDD / TAS Interview and Case Study Mini Guide
FDD / TAS Interview and Case Study Mini Guide
FDD / TAS (Financial Due Diligence / Transaction Advisory Service) careers are not often discussed under the accounting 'umbrella' and as such it can often be difficult from the outside looking in. The below mini-guide for FDD interviews and case studies may be beneficial to anyone:
i) New to the concept of FDD;
ii) Thinking of a career in FDD but needs further information; or
iii) FDD Interview/Case-study candidate
What is FDD:
Financial Due Diligence, also referred to as Transaction Services or Transaction Advisory Services, is a service provided by professional services firms to clients on either end of a potential transaction (M&A). The FDD provider will undertake financial analysis on a target company for the benefit of their client. FDD concerns itself with anything that will impact deal value (excluding multiple application – see note below). This often relates to a focus three key work streams:
i) Quality of Earnings;
ii) Net Debt; and
iii) Net Working Capital
The analysis undertaken provides information necessary for the client to better understand the viability of the proposed transaction, both from a risk and value perspective.
Please note that the client will likely dictate their key areas of risk and the scope of work will be adjusted to reflect this. An example may be that the PE firm looking to acquire the business may really want to get to grips with the customer economics in play - as such the scope of work will reflect that analysis needs to be undertaken on average customer ROI/IRR, considering average customer revenue, average contract lengths customer acquisition costs, customer retention costs, service delivery costs etc.
Buy-side: Performing due diligence on behalf of a potential acquirer (the client)
Sell-side (Vendor Due Diligence): Producing an FDD-style report (referred to as a VDD report) on behalf the seller (the client), which will be shared with potential acquirers and the advisors of potential acquirers.
Three key workstreams:
i) Quality of Earnings: The quality of earnings workstream concerns identifying the underlying/normalised/adjusted EBITDA generated by the target in the most recent financial periods. This will allow the client to further understand the earnings potential of the target and underlying growth rates.
ii) Net Debt: The net debt workstream concerns identifying the value of net debt that should be deducted from enterprise value in the equity bridge. FDD will involve identifying and quantifying any other debt-like (or cash-like) items that are not recorded within reported net debt but should be considered from a deal-value perspective. Examples of items that are debt-like are; i) interest accrued on external debt; ii) rent-free period accruals; and iii) debt break costs etc.
iii) Net Working Capital: The net working capital workstream concerns the identification of: i) delivered net working capital; and ii) the adjusted net working capital benchmark (often referred to as the "NWC peg"). FDD providers will be required to identify and quantify any required adjustments to both delivered net working capital and the net working capital benchmark.
Key workstreams impact on Target valuation:
EBITDA Multiple Valuation =
i) Adjusted EBITDA x Multiple
ii) Less: Net Debt
iii) Plus/Less: Over-delivery/(under-delivery) of Net Working Capital
Accepted adjustments to EBITDA will have a magnified impact on valuation due to the application of a multiple. E.g. a £50k adjustment would have a £500k impact on valuation where a 10x multiple is being applied.
Adjustments/items identified for Net Debt have a dollar-for-dollar impact on valuation.
NWC impacts will depend on the nature of the monthly profile of any adjustment as they could impact both delivered and benchmark NWC. Therefore the maximum valuation impact is dollar-for-dollar.
Note that the appropriate EBITDA multiple is not an area of analysis undertaken by FDD providers.
Other workstreams included in FDD reports include (non-exhaustive):
i) Historical Trading
ii) Customer Analysis
iii) Product/Service Line Analysis
iv) Outturn/Forecast Review
v) Cash Flow and Capex Analysis
Typical project process:
1. Definition of scope
2. Information Memorandum and intro call
3. Submission of information request list
4. Dataroom/data receipt
5. Databook building and question list development
6. Management meeting (meeting with target to address question list)
7. Follow-up requests and report production
8. Internal review
9. Draft report delivery and read-out to client
10. Report finalisation/signing
11. Ad-hoc SPA review help (depends if separate dedicated service line exists)
Compensation and WLB:
i) Compensation will be poorer than IB but better than audit; and
ii) WLB will be better than IB but different to audit
WLB is different to audit in the sense that both service lines have very busy times, however FDD workload is highly unpredictable from week-to-week and even day-to-day. This is in contrast to the well-known audit 'busy season'. The unpredictable nature of FDD working hours can make balancing life's other responsibilities, but this is unfortunately all part of the trade-off.
The following exits I have seen in the profession include, but are not limited to, the following:
1. Corporate development
3. PE in-house DD
4. PE deal-team (where the deal team wishes to bring on individuals with accounting and DD expertise)
5. Corporate strategy
Note: I have never seen anyone return to Audit!
Interviews and case study focus:
Interviews and case studies will vary depending on the seniority of the role and the previous experience of the candidate but there will be a common theme. This common theme is that they will test your understanding and through-process for adjustment identification, treatment and calculation. For each of the three workstreams, particularly quality of earnings, a candidate needs to be able to articulate the rationale for an adjustment in a clear and concise manner (after all, this is exactly what will go in an FDD report).
This is outside of the almost certain 'fit' questions which will help the team understand if they'd like to work with you and/or go for a beer with you (which is important when the entire team may be in the blender on a difficult deal).
Questions you should be able to answer?
1. Why is it necessary to exclude exceptional items in quality of earnings analysis?
2. How should accrued professional fees solely pertaining to the potential transaction be treated in quality of earnings, net working capital and net debt analysis?
3. Please discuss the appropriate adjustment for an unused legal provision that was accrued in one year and reversed in the next.
Questions that would put you ahead of the competition should you know the answer?
1. Please discuss how a minority interest (i.e. where one of the target's operating subsidiaries is not 100% owned by the target's Group) should be reflected in the FDD report?
2. Please discuss how deferred consideration with payments due over the next 5 years from a previous transaction undertaken by the target should be reflected in the FDD report?
3. Please discuss how a DSO normalisation calculation would be undertaken and its important from a NWC perspective.
Happy to answer any specific questions anyone has on the profession.
Source: 5+ years in FDD in London, UK
Recommended resource: https://www.fddinterviewprep.com/