The rise of financial factbooks in M&A transactions

Jonathan Wade, corporate finance partner, examines the key aspects of a financial factbook, and their increasing role and importance in enhancing value in M&A transactions.

One of the emerging trends in merger and acquisition (M&A) transactions that has accelerated post pandemic is the rise of what’s become known in the market as the ‘financial factbook’. But what exactly is this? why is it trending? and how does it enhance value?

So what are financial factbooks (FFBs) and what sets them apart from vendor due diligence?

Financial factbooks (‘FFBs’) and vendor due diligence reports (‘VDDs’) are documents in M&A transactions provided by sellers to potential purchasers with the purpose of presenting information about the financial (& tax) aspects of the seller’s business. Both products significantly enhance value for the vendor by:

1. reducing sales risk as a result of early identification of key risks and upsides - so they can be managed as a ‘home’ team, prior to buyer scrutiny;
2. increasing competitive tension and value in the auction process by greatly reducing scope for buyer price chips in discovery post exclusivity; and
3. accelerating the M&A process by underpinning key selling messages with credible financial data and thereby condensing the ‘period of uncertainty’ of post exclusivity timescales (as well as easing pressure on the seller’s management team).

FFBs are distinct from VDDs in that:

• FFBs present the financials in a descriptive, factual manner, outlining management’s views. VDDs also typically provides the author’s own independent assessments of financial information from a qualitative perspective eg a FFB would not provide an RSM opinion on the achievability of the forecasts; 
• the scope of a FFB is more flexible, often focusing on the key value drivers underpinning the equity story and data integrity. In contrast, a VDD typically includes a comprehensive review of the financial information deemed relevant to potential purchasers; and
• unlike VDD, FFBs are provided on a non-reliance basis, whereby no legal duty of care is provided to the ultimate purchaser.

What are the benefits?

Whilst VDD is the ‘gold-plated standard’ for sell side due diligence, in the right context the FFB provides several benefits:

• as the provider is not expected to be fully independent, they can become a valuable extension of the seller’s wider advisory team eg to support negotiations around normal levels of working capital;
• this also allows the provider to ‘roll up their sleeves’ more, such as assisting with the preparation of the financial information where historically there have been data challenges eg related party owned companies that have never been formally consolidated or audited. A VDD provider is more constrained by the perception of not ‘marking your own homework’; and
• a more flexible scope of work can be an advantage. This can improve efficiency by focusing more on the issues that matter and avoiding ‘time-sinks’ trying to tie up every loose end which is more the expectation of VDD.

What situations are best suited to a financial factbook rather than VDD?

Typically, a trade buyer pool – and especially an overseas buyer – can be a hallmark to consider for when to adopt the benefits of FFB. Unlike a private equity (PE) buyer, a trade buyer is more likely to do their own ‘top up’ DD and is less likely to be interested in an external accountant’s formal view of the forecasts. 

Additionally, as noted above, situations where the base accounting historically has challenges are another key feature of where a FFB approach may work best. A VDD report in certain situations may end up being heavily caveated and potentially counter-productive. Whereas, a FFB provider could more pro-actively support, prepare and present key reconciliations. The FFB approach could also enable a line to drawn earlier in the DD process to maintain deal momentum, rather than trying to fully nail down all issues completely at the same time.

Finally, in situations of budget sensitivity, there can be an economic benefit of FFBs over VDDs in that, given reduced scope, they are typically less expensive due to their very nature. A well-delivered FFB designed to add value to key seller objectives may however often be a four to five week process (versus six weeks for a VDD) depending on complexity and scope - or longer where there are information challenges to unpick.

RSM UK financial factbook: Market-leading credentials

RSM UK has developed a leading FFB product in the mid-market that has gained considerable traction with sellers and the M&A community. We believe a focused and tailored report is more likely to be read by key decision-makers and represents an opportunity to underpin key messaging.

Having seen effective use of the RSM UK FFB as a theme in the wider consulting sector, including the recent sales of Qubix, Sionic and CloudShift to international trade acquirers, we have now seen this trend emerge in the recruitment sector. Most recently, in terms of completed transactions, RSM provided an FFB in the successful sale of Hale International to a US trade buyer Oxford Global Resources Inc, an HIG Capital portfolio company. 

Hale is a premium staffing solutions firm specialising in providing highly skilled Workday professionals to organisations across the USA. A fast-growing business, Hale was unaudited historically with the finance function historically outsourced. RSM UK acted as a sell side due diligence provider for Hale with the FFB (covering financial and tax) and related deal support advice helping to maximise value for Hale’s shareholders in their disposal of the business. 

For support or guidance with preparing a financial factbook, please contact Jonathan Wade.