KPMG - Adjusted Earnings - EV To Equity Bridge

Adjusted
Earnings
EV to Equity
Bridge
Presentation to Rothschild & Co
30 March 2023
Confidential
Contents
01 Overview
02 Adjusted Earnings
03 EV to Equity Bridge
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01
Overview
| Overview |
Adjusted earnings and Adjusted Net debt are the 2 legs of the
Purchase Price
Multiple earnings valuation
Adjusted
earnings X Multiple
Adjusted
Net Debt = Purchase price
DCF valuation
DCF
(adjusted
earnings
as the
starting
point of the
Adjusted
Net Debt = Purchase price
BP)
Notes
| Overview |
Adjusted Earnings -Basic principles and key questions
Recurring /
Reported Potential Other items to
Routine
EBITDA adjustments consider
EBITDA
• What level of EBITDA • What type of • Are there other items • Critical view of EBITDA,
should be analysed? adjustments to to consider? but:
• What is the perimeter historical performance ❑ Documented: explain
of EBITDA to analyse: should be considered? the rationale of
historical, carve-out • How identify them? adjustments and give
accounts (accounts of • Do we include reference.
a partial business subjective and ❑ Honest: highlight
unit), pro forma unquantified subjectivity, grey
accounts, etc…? adjustments? areas, limitations.
❑ Fair: report unders
and overs, regardless
of final result.
Notes
| Overview |
EV to Equity bridge -What are the main different types of
adjustments?
ADJUSTED NET DEBT
PERIMETER
• Minority interests.
• Acquisitions & disposals.
NON-RECURRING ITEMS
• New stores, products, contracts. • One off income and charges.
• Discontinued operations. • Management fees.
FX
NORMALISATION
• Transactional effect.
• Bad debt.
• Translational effect.
• Inventories.
• Hedging.
• Pension (service costs).
• Performance @ constant rates.
• Restructuring costs.
ACCOUNTING
• GAAP / EBITDA definition RUN-RATE
• Change in accounting policies. • Add openings target EBITDA (at maturity
• Cut-off. and on a full year basis).
• Below EBITDA items. • Remove closed stores EBITDA.
• Opening / closing costs.
CARVE OUT
And/or
REPORTED NET DEBT STANDALONE COSTS
Notes
| Overview |
EV to Equity bridge - Basic principles and key questions
Debt-like
Reported and Other items to EV to Equity
net debt cash-like consider bridge
items
• What level of net debt • What type of other • Is our role to show our • Critical view of net debt,
should be analysed? debt-like and cash-like view of adjusted net but:
items should be debt or should we ❑ Documented: explain
considered? simply give the reader the rationale of
• How identify them? elements required to adjustments and give
form his own reference.
• Do we include
judgment?
subjective and un- ❑ Honest: highlight
quantified subjectivity, grey
adjustments? areas, limitations.
❑ Fair: report unders
and overs, regardless
of final result.
Notes
| Overview |
EV to Equity bridge -What are the main different types of
adjustments?
ADJUSTED NET DEBT
PERIMETER
• Non controlling interests.
• Earn-out clauses.
CASH OUTFLOWS RELATED
• Capex payables. TO RISKS & CHARGES
• Social disputes.
• Litigations with 3rd parties.
• LT employee benefits.
• Tax, labour, etc…
ACCOUNTING
• Trapped cash.
TRANSACTION COSTS
• Convertible bonds.
• Break-up fees.
• Debt issuance costs capitalized.
• Change of control.
• FV of financial instruments
• Fees to banks/advisors.
• IFRS16.
• Bonus related to transaction.
WORKING CAPITAL
• Overdue receivables/payables. PURCHASE PRICE
• Profit-sharing internalized. ADJUSTMENTS
• Deferred income / prepaid exp..
• WC seasonality (actual vs norm.).
• Capex (actual vs budget).
• LT employee benefits.
RUN-RATE
• Related capex.
REPORTED NET DEBT
Notes
| Overview |
Purchase Price
PURCHASE PRICE
ADJUSTED EARNINGS ADJUSTED NET DEBT

PERIMETER ADJUSTMENTS
MINORITY INTERESTS* PURCHASE PRICE OF MINORITY INTERESTS*
ACQUISITIONS (PRO FORMA) RELATED NET DEBT, EARN-OUT, etc…
KEY TAKE AWAYS

DISPOSALS (PRO FORMA) RELATED CASH INFLOWS, WARRANTIES, etc…
1. CONCISTENCY
BETWEEN ADJUSTED
RUN-RATE RELATED CAPEX
EARNINGS AND
ADJUSTED NET DEBT
BELOW EBITDA ITEMS SOME RELATED ASSETS AND LIABILITIES
2. BOTH ANALYZES TO BE
PERFORMED PENSION COMMITMENTS & FV of PLAN ASSET
PENSION (service costs, interest costs)
CONCOMITANTLY (net of deferred tax)
IFRS 16: RENTS CANCELLATION IFRS 16: RELATED FINANCIAL LIABILITIES
NO PROFIT SHARING IN NET DEBT

PROFIT-SHARING IN EBITDA
(except if internalized)
Note: *Regarding Non-controlling interests, different approaches exist
Notes
02
Adjusted
Earnings
16
| Adjusted Earnings |
Why adjusting historical profitability?
OBJECTIVE
• The aim of the Quality of earnings is to present a view of the recurring profitability of a Company.
• This analysis is used in several valuation models (e.g. DCF, EBITDAx, etc…), combined with the Adjusted Net Debt analysis.
• It is also useful to avoid to project non-recurring income and expenses while preparing the Business Plan.
METHODOLOGY
• EBITDA is generally sourced from Management accounts (which may differ from audited accounts, due to a timing difference).
• The period under review is generally 3 fiscal years, plus current trading (e.g. LTM, Budget, Last Estimate, or Reforecast).
• Identify ‘non-recurring’ items or 'exceptional' items or otherwise unrepresentative of the trend in EBITDA based on all documents
made available by
Management, including:
❑ Trial balances.
❑ Management accounts / reporting.
❑ Statutory accounts (mostly audited).
❑ Any other relevant documents or discussions.
• Enquire into below EBITDA items, to identify potential operating recurring items (e.g. discounts granted to customers for early
payments posted in financial result, recurring restructuring booked in exceptional result, FX gains and losses related to
operations, among others).
• Discuss potential adjustments with Management (sell-side) or challenge Management adjustments disclosed in a VDD report
(buy-side).
What are the key attention points and limitations?
LIMITATIONS
• EBITDA (or EBIT, EBITDAR, etc…) is a non GAAP metric => there is no specific definition:
❑ For instance, movements of provisions can be above or below EBITDA.
• This analysis is subjective => one may have a different view:
❑ As a result, the following caveat / attention point is included in our report.
Our underlying earnings analysis is for indicative purposes only. We have sought to illustrate the effect on EBITDA of excluding
those items identified in the course of our work in accordance with the terms of our engagement letter we consider to be 'non-
recurring' or 'exceptional' or otherwise unrepresentative of the trend in EBITDA; however, such analysis is necessarily subjective.
SOURCES OF FINANCIAL STATEMENTS: SPECIFIC CASES

It may happen that the basis of valuation is not audited consolidated accounts, but accounts prepared specifically in the context of the
contemplated transaction, such as:
• Pro forma accounts:
When a Group has historically experienced several build-up, it may happen that the Vendor due diligence is based on ‘Pro forma
accounts’ consisting in adding
retroactively over the period the contribution of newly acquired businesses.
❑ Due diligence work: understand and challenge the Basis of preparation of Pro forma out accounts.
• Carve-out accounts:
When a Group sells a business unit which is not a legal entity, it may happen that the Vendor due diligence is based on ‘Carve-out
accounts’ consisting in presenting the performance of the BU on a standalone basis.
❑ Due diligence work: understand and challenge the Basis of preparation of Carve-out accounts + Separation
considerations.
Notes
What are the main different types of adjustments?
CATEGORIES OF EBITDA ADJUSTMENTS

Given the numbers of potential adjustments, together with the number of legal
entities under review, it may be useful to categorize adjustments as follows:
A. Perimeter adjustments correspond to scoping effects (e.g. removing
from EBITDA the contribution of closed facilities or discontinued
operations, add contribution of newly acquired businesses which may be
in progress).
B. FX adjustments correspond to FX gains and losses related to operations
that may be booked below EBITDA in financial result. It may also
correspond to a ‘normative adjustment’ to present performance at
constant FX rates.
C. Accounting adjustments correspond to accounting matters, such as
changes in consolidation method, in accounting policies (i.e. IFRS16),
reclassification from financial or extraordinary result to operating result,
etc…).
D. Non-recurring adjustments correspond to one-time or non-recurring
Source: Management accounts, KPMG analysis income and expenses, or items not representative of the routine activity.
E. Normalization adjustments correspond to the ‘normalization’ of some
costs or income. For illustration purpose only, performance can be
presented considering constant FX rates, constant commodity prices,
normative production volumes (in case of shutdown or industrial issues),
etc…
F. Run-rate adjustments corresponds to a target profitability taking into
account the full year impact and the maturity. Very common analysis in
the retail sector involving numerous stores with a
ramp-up profile.
G. Other adjustments correspond to other specific adjustments.
Source: Management accounts, KPMG analysis
Notes
A. What are the main Perimeter adjustments? (1/2)
A. Perimeter adjustments
The historical performance of a Company may be influenced by significant
change in the transaction perimeter, including:
• Acquisitions or disposals (of companies, stores, branches of activity,
assets).
• Gains or losses (of contracts, clients, etc…).
In addition, the Transaction perimeter may include holding companies, non
controlling interests, JV and affiliates, non consolidated entities, etc…
1. The series of EBITDA may not be fully consistent over the period under
review mainly due to change in the percentage of ownership or in the
consolidation method.
2. Non-controlling interests (‘Minority interests’). The EBITDA presented
in a VDD may correspond to the contribution at 100% of legal entities
which can be not wholly owned. From a valuation standpoint, minority
interests can be considered with different approaches, of which:
• Considering only the share of EBITDA in the QoE.
• Considering the purchase price of minority interests in the QoD.
• Considering the average actual cash outflows paid out of the Group in the
BP / DCF / Operating model.
3. Contribution of JV, affiliates, entities consolidated through the equity
method should be considered carefully. For instance, the contribution of
entities consolidated through the equity method is booked below EBITDA.
Notes
A. What are the main Perimeter adjustments? (2/2)
A. Perimeter adjustments (cont’d)

4 & 5. Discontinued activities / products / closed stores / etc… (=> OUT)
• EBITDA contribution to be removed from historical reported EBITDA.
• Potential cash inflows (net of disposal costs) to be considered as cash-
like items in the EV to Equity bridge.
6 & 7. New activities / products / stores recently opened / etc… (=> IN)
• EBITDA contribution to be added to historical reported EBITDA (see pro
forma accounts).
• Potential cash outflows to be considered as debt-like items in the EV to
Equity bridge, such as:
❑ Purchase price remaining to be paid, and potential earn-out.
❑ Opening / conversion / refurbishment capex and opex
• Run-rate analysis could be envisaged considering i) the full-year impact
and ii) the maturity => ‘target’ EBITDA when the ‘ramp-up’ phase is
achieved.
❑ Related net debt (cash) and capex to be considered consistently.
8. Holding companies & Manco
• In order to facilitate the ‘structuring’ of the deal, it may happen that the
ultimate transaction perimeter includes holding companies / manco.
• Related contribution to be considered both in QoE and QoD.
Notes
B. What are the main FX adjustments?
B. FX adjustments
The historical performance of a Company may be influenced by significant FX
impacts and fluctuations:
1. Transaction effect
• FX gains and losses are recognized when a Company has transactions
in foreign currencies (or driven in foreign currencies) that may differ from
local currency. Those transactions may relate to operating, investing or
financing activities.
2. Hedging
• Generally, Hedging gains and losses which are realized and related to
operations are reclassified from financial result to operating result.
2. Translation effect
• A Group may recognize FX gains and losses in its consolidated accounts
when converting the financial statements of its subsidiaries which have a
local currency which differs from reporting currency. This may distort the
dynamic view of the performance of a Company (e.g. depreciation of the
Egyptian pound).
4. Unrealized gains & losses
• Represents the revaluation of balance sheet monetary items
(receivables, payables, financial debt, etc…) labelled in foreign currency.
The operations related portion could be regarded as forming part of
EBITDA.
5. Other
• It may happen that our clients request from us an analysis of the
performance at constant FX rates – see Normative adjustments.
Notes
C. What are the main Accounting adjustments? (1/2)
C. Accounting adjustments
The historical performance of a Company may be influenced by accounting
matters, including:
1. Variance between audited accounts and management accounts : a
reconciliation between the 2 sets of financials is generally disclosed in the
appendices of any VDD report.
2. Change in accounting policies / presentation : in order to present a
series of numbers consistent over the period under review, the last
accounting policies can be applied retroactively over the 3 last years.
3. Cut-off issues: it may happen that an income or an expense is not
booked in the right exercise. For instance, a Company incurs a damage in
year N and is granted a compensation in year N+1. The adjustment
generally consists in reflecting the item in the right exercise.
4. Movements of provisions for risks and charges (excl. pensions).
Source: Management accounts, KPMG analysis They can be booked above or below EBITDA. The adjustment can consist
in removing from EBITDA the ‘unused provision reversal’ booked above
EBITDA.
5. CVAE is a recurring tax computed based on value-added. Under French
GAAP, this tax is booked above EBITDA. Under IFRS, there is an option
to book this tax below EBITDA (in Corporate Income Tax), leading to an
improvement of EBITDA => only a presentation impact (i.e. nil cash flow
impact).
Notes
C. What are the main Accounting adjustments? (2/2)
C. Accounting adjustments (cont’d)

6. IFRS16 relates to a lease accounting treatment, applicable from 1st
January 2019. It would lead to present both a higher EBITDA, and a
higher debt, as some leases may no longer be considered as operating
leases, but as assets owned by the Group: a ‘Right of use' asset will be
recognized in the balance sheet, and a financial liability corresponding to
the Net Present Value of future minimum payments.
• This topic needs to be anticipated by Sellers / Buyers and their
advisors.
• It is subject to a dedicated training session as it is a hot and complex
topic going forward.
7. Some items booked in financial result (i.e. below EBITDA) could be
considered as recurring operating income or charges. For instance,
rebates for early payment (which is in our view an incentive to boost
sales), or FX gains and losses related to operations.
Source: Management accounts, KPMG analysis 8. Some items booked in exceptional result (i.e. below EBITDA) could be
recurring restructuring, opening / conversion / refurbishment costs, etc…
9. Other (e.g. higher reduction for very low salaries according to LFSS2018,
etc…).
Notes
D. What are the main Non-recurring adjustments?
D. Recurrence adjustments
The historical performance of a Company may be influenced by ‘non-recurring
items’ or ‘items not representative’ of the routine performance, including:
1. Capital gains and losses.
2. Reversal of old accruals.
3. Severance payment / restructuring costs.
4. Transformation costs.
5. Insurance reimbursement.
6. Eviction indemnities.
7. Opening costs* (e.g. in retail, restaurant service, hotels, etc…).
8. Closing costs* (e.g. in retail, restaurant service, hotels, etc…).
9. Conversion costs* (e.g. in retail, restaurant service, hotels, etc…).
10. Refurbishment costs* (e.g. in retail, restaurant service, hotels, etc…).
11. One-off marketing campaign.
12. Any other one-off, non-recurring, non operating income or expenses.
*To be analyzed on a case-by-case basis. Depends also on market practice
Notes
E. What are the main Normalisationadjustments? (1/2)
E. Normative adjustments
The historical performance of a Company may be influenced by ‘non
normative’ income or charges, which need to be normalized, or spread over
the contract duration, or considered linearly, or in line with the activity, such as:
1. Cost of bad debt: in our view, the EBITDA should include a ‘normative’
cost of bad debt to materialize the fact that a portion of revenue / invoices
will not translate into cash ultimately. In general, the adjustment consists
in considering above EBITDA a ‘normative’ cost of bad debt, based the
average cost of actual bad debt write-off observed over the long run.
2. Cost of aging/slow moving inventories: in our view, the EBITDA should
include a ‘normative’ cost of inventories write-off to reflect the fact that a
portion of purchases / inventories will be ultimately written-off. In general,
the adjustment consists in considering above EBITDA a ‘normative’ costs
of inventories, based on a long-term average cost of inventories write-off.
3. LT employee benefits / Pension (service costs): in our view a
Source: Management accounts, KPMG analysis ‘normative’ costs of pension / long-term employee benefits should be
considered above EBITDA. Generally, the adjustment consists in
considering a ‘normative’ service cost booked above EBITDA.
4. Restructuring costs are generally booked below EBITDA. However, it
may happen that a ‘recurring’ level of restructuring costs may be assessed
(especially in People Companies).
Notes
E. What are the main Normalisationadjustments? (2/2)
E. Normative adjustments (cont’d)
5. Free rents: the savings from free rents granted at the inception of a new
lease can be spread over the duration of the lease agreement. This is a
non cash adjustment.
6. Long-term contracts may present significant margin swings which can
be linearized over the contract duration.
7. FX: an analysis may consist in presenting the historical performance at
constant FX rates when reporting currency differs from local currencies.
8. Commodities’ prices: an analysis can consist in presenting the historical
performance at constant commodities’ prices:
• Case studies: transaction involving raw materials (e.g. steel), precious
metals (jewelry), oil & gas, etc…
• An analysis can consist in assessing the ‘Winfall effect’ (‘effet
d’aubaine’), when there is a delay between fluctuations in raw
materials costs and impact in the books => an artificial margin is
Source: Management accounts, KPMG analysis generated due to time lag.
10. Multi-year plant shutdown impacts can be spread over the period to
avoid to impact a specific year.
11. Other (example: constant Mobile Termination Rates in the Telco sector).
* Warning: the adjustments should not result in presenting the same
performance each year, but only normalize key unusual / specific events.
Notes
F. What is a Run-rate adjustment?
F. Run-rate adjustments
The ‘run-rate’ (or ‘embedded’) analysis consists in presenting the performance
Ramp-Up In this example, target EBITDA is of a company:
reached over 3 years • At maturity (i.e. once the ‘Target’ profitability has been reached, after
1.2
Target CA / EBITDA
100% the ‘ramp-up’ period).

1.0
80% • On a full year basis.
0.8
50% This is a typical analysis carried out in the following sectors: retail, restaurant
0.6
service, elderly care, civil works, temporary agencies, etc…all sectors involving
0.4 a significant number of stores, restaurants, agencies, homes, etc…with ramp-
up.
0.2
- -
Year 1 Year 2 Year 3
Methodology
• Definition of the ‘stores’ involved in the RR analysis (the ‘secured
perimeter’).
• Assessment of a target EBITDA by type of stores, location, brand,
concept, size, vintage, etc.
This generally implies an analysis of the historical performance of
mature stores by cohort.
• Assessment of a ramp-up period which may differ by type of store.
• The adjustment consists basically in replacing the ‘actual’ performance
by a ‘target’ performance for a selection of stores.
• Cancellation of the contribution of stores closed / to be closed.
• For consistency purpose, related capex (remaining to be cashed
out) to be considered in the Adjusted Net Debt analysis.
Notes
03
EV to Equity
Bridge
40
What are the key attention points and limitations?
PRILIMINARY NOTE
• Consider whether the Transaction is a Share deal or an Asset deal (this can evolve during the process).
• Inquire if the Transaction includes a Completion accounts or a Locked-box mechanism.
❑ Completion accounts => net debt definition in the SPA applied at the Closing Date based on a ‘Reference’ Balance Sheet
(audited or unaudited).
❑ Locked-box => projections at the Closing Date (‘Locked-box’ date).
• These 2 mechanisms are subject to a dedicated training session.
• Consider the Purchase Price adjustments suggested by the Vendor in the SPA.
• Consider that ‘Net debt’ and ‘Working capital’ are defined in the SPA, after agreement between the Vendor and the Buyer.
• Consider that not all (adjusted) net debt items have to be refunded at the Closing date (e.g. financial leases).
• Consider that the items identified can be considered in 3 different ways:
❑ Either directly in the net debt definition.
❑ Or in the BP / DCF / projections.
❑ Or in the SPA, through Reps and Warranties.
LIMITATIONS
• Net debt (cash) is a non GAAP metric => there is no specific definition.
• This analysis is subjective => one may have a different view.
Why adjusting balance sheet?
OBJECTIVE
• The aim of the EV to Equity bridge is to present a view of the ‘economic’ Net Financial Debt (cash) of the Company, which is the
second leg of the Purchase Price.
• A view of the Adjusted Net Debt is also useful to size the fund flows, including:
❑ Financing of the shares and reimbursement of the current borrowings.
❑ Financing of the capex requirements (=> generally through a dedicated Capex line).
❑ Financing of the working capital requirements (=> generally through a Revolving Credit Facility).
METHODOLOGY
• The EV to Equity bridge corresponds to an extended definition of the Net Financial Debt (cash) which differs from the books.
• Identification of potential adjustments relies on a very granular analysis of Balance sheet items, Off-sheet commitments, SPA
(among other documents), including identification of:
❑ Potential cash outflows (e.g. litigations, earn-out, break-up fees, transaction costs, etc…).
❑ Potential cash inflows (e.g. asset disposals, insurance reimbursement, tax losses carried forward, etc…).
❑ Potential Purchase Price adjustments, such as:
• Seasonality of Working Capital (e.g. difference between Actual Adjusted and Normative Working Capital).
• Seasonality of Capex (e.g. difference between Actual and Budgeted maintenance capex) and Capex catch-up /
replacement.
• Long-term employee benefits.
• Specific analysis to assess i) the Normative level of working capital and ii) the Normative level of recurring / maintenance Capex.
Notes
| EV to Equity bridge |
What are the main different types of adjustments?
CATEGORIES OF EBITDA ADJUSTMENTS

The EV to Equity bridge analysis highlights potential adjustments identified at
the last Balance sheet date, which can be categorized as follows:
A. Perimeter adjustments correspond to scoping effect (e.g. earn-out from
recent acquisitions, net cash / (debt) from companies to be acquired and
included in pro forma EBITDA, capex from stores included in the run-rate
analysis, etc…).
B. Accounting adjustments correspond to adjustments linked to the
definition of net debt (e.g. convertible bonds, trapped cash, debt issuance
costs capitalized, etc…).
C. Cash-outflows from risks and charges mainly correspond to an
estimation of the cash outflows related to risks (e.g. litigations with 3rd
parties, restructuring) or charges (e.g. pension, maintenance, warranty).
They result from the analysis of provisions for risks and charges, off-
balance sheet commitments, and other documents to also identify risks
unrecognized in the books.
D. Working capital items corresponds to cash-like or debt-like items which
are included in the working capital. The treatment of capex and CIT is
variable from a transaction to another.
E. Transaction costs correspond to all impacts and potential future cash
outflows related to the contemplated transaction (e.g. banks and external
advisors fees, break-up fees, change of control clauses).
F/G/H corresponds to potential purchase price adjustment clauses
(notably WC).
I. Other adjustments correspond to other specific adjustments (e.g.
findings from other advisors such as Tax, Labour, IT).
Notes
A. What are the main Perimeter adjustments?
A. Perimeter adjustments
The (audited) net debt of a Company may be influenced by significant
changes in the transaction perimeter. Frequent adjustments are the
followings:
1. Non-controlling interests (‘Minority interests’). When the Vendor
presents an EBITDA at 100% while in practice he does not fully own the
legal entities, the purchase price of minority interests can be considered in
the Quality of Net debt. Important to analyze the shareholder’s agreement
to identify potential put or call options, as well as formulae to assess the
purchase price of minority shares.
2. Net debt from acquisitions. When the ‘adjusted EBITDA’ includes the
contribution of acquisition (sometimes in progress), for consistency
purpose the ‘adjusted Net debt’ should include related net debt (or cash).
3. Earn-out clauses from acquisitions. (i.e. below EBITDA) could be
recurring restructuring, opening / conversion / refurbishment costs, etc…
4. The contribution of non consolidated entities, entities consolidated
through the equity method etc… are generally not included in the
reported EBITDA.
5. Holdings and Manco. In order to facilitate the ‘structuring’ of the deal, it
may happen that the ultimate transaction perimeter includes holding
companies / manco. Related net debt to be considered.
6. Other.
Notes
B. What are the main Accounting adjustments?
B. Accounting adjustments
The definition of the net debt (or cash) as audited / reported may differ from
generally agreed definition and market practices
1. Trapped cash. It may happen that the cash and cash equivalents are not
readily and fully available due to legal or commercial constraints.
2. Convertible bonds are considered as quasi-equity by Private Equity
funds, while there are debt from a pure accounting standpoint. The
adjustment generally consists in removing convertible bonds from the Net
debt definition. Attention to be drawn to non-conversion premium. In
parallel, the SPA should highlight that the purchase price is for both the
owners of the shares and the convertible bonds.
3. Debt issuance costs are generally capitalized, booked as a reduction of
financial liabilities, and depreciated over the loan duration. The adjustment
consists in removing this item from net debt as cash already cashed out.
4. Assets and Liabilities related to exceptional items. As exceptional
income or charges are booked below EBITDA, related assets or liabilities
existing at the Closing date can be considered as
cash-like / debt-like items.
5. Stock options / BSPCE / etc: to be considered in our view more as
dilutive instruments, than pure net debt adjustments.
6. IFRS16: see Adjusted EBITDA section for further comments.
7. Other
Notes
C. What are the main Working Capital adjustments? (1/2)
C. Working capital adjustments
The working capital may include some debt-like or cash-like items
Although most of monthly WC fluctuations are considered in the Adjusted
Net debt analysis through the ‘Working capital seasonality adjustment’,
an attention should be drawn to specific items.
1. Current accounts. It may happen that current accounts with affiliates and
parent company may be booked in working capital while they are
intercompany cash accounts. In addition, it may happen that the SPA
states that all intercompany positions should be nil at the Closing date.
2. Overdue payables. Cash position may be artificially inflated due to the
fact that the Company delays the payments to its suppliers. In our view,
overdue payables could be considered as a reduction of cash.
➢ Due diligence work: review of the aging payables.
3. Overdue receivables. It may happen that the Vendor would like to
Source: Management accounts, KPMG analysis consider some overdue receivables in the cash definition.
➢ Due diligence work: review of the aging receivables.
4. Factoring. In order to collect cash earlier, some Companies use factoring
with or without recourse (or Dailly). As a result, cash is inflated compared
to a usual situation, and the Company can be forced to refund the factor if
the customer does not pay ultimately.
➢ The adjustment consists generally in presenting the balance sheet as if
there was no factoring in place.
Notes
C. What are the main Working Capital adjustments? (2/2)
C. Working capital adjustments (cont’d)
5. Profit-sharing payables. Profit sharing can be either internalized or
externalized. The profit-sharing kept in the Company and greater than 1
year can be considered as a debt-like item.
6. Prepaid expenses can be in certain circumstances considered as cash-
like items. They correspond to the payment in advance of some expenses
that would be recognized later in the books from a pure accounting
standpoint.
7. Deferred income can be in certain circumstances considered as debt-like
items. It corresponds to the collection of cash in advance of the revenue
recognition.
8. Other (e.g. yearly bonuses paid to employees, salaries to be paid in M+1,
cumulated research tax credit, etc…).
Important note:
• Based on our experience, Capex payables and Corporate Income Tax
payables can be considered either as debt-like item, or working capital
items, or other items.
Notes
D. What are the main Cash outflows related to risks and charges?
D. Cash outflows related to risks and charges
An extended definition of the net debt may include the potential cash outflows
related to the risks and charges the Company is facing. The latter are either:
• Recognized in the balance sheet through provisions for risks and
charges.
• Not recognized in the balance sheet, but disclosed in the Notes.
• Mentioned in other documents than the financial statements (e.g. legal
note).
1. Provisions for risks. An estimation from the legal department / advisors
is useful to understand litigations and assess potential cash outflows. The
amount booked can significantly differ from the claim and final payment.
2. Provisions for charges. Generally, provisions for charges are ‘rolling’
and implicitly included in the BP (e.g. warranty, maintenance).
3. LT employee benefits / pension (e.g. retirement indemnities, jubilee
awards, medical care) are commitments of the Company towards its
employees. They are generally considered as debt-like items. They are
computed based on actuarial assumptions (e.g. turnover, mortality,
discount rate etc…). A specific analysis is required.
4. Pending / unrecognized litigations. Refer to Legal due diligence report.
5. Off-balance sheet commitments need to be reviewed carefully as they
may include some debt-like items (e.g. Exploration commitments in the Oil
& Gas sector (E&P)).required.
6. Other (e.g. findings from other advisors, labour, legal, tax, etc…).
Notes
E. What are the main Transaction adjustments?
E. Transaction matters
1. Break-up fees refer to some contracts which may include break-up fees
or change of control clauses, which may have an impact on the deal
value.
2. Bonuses granted to Management with regard to the contemplated
transaction could be considered as debt-like item.
3. Fees remaining to be paid to external advisors, including banks (M&A),
and other advisors, incurred by the Group with regard to the contemplated
transaction could be considered as a
Source: Management accounts, KPMG analysis debt-like item.
4. Other (e.g. standalone set-up costs, IT to be replaced).
Risks identified by other advisors (especially Tax matters)

In our view, the QoD should also consolidate the findings of other advisors
involved in the process such as lawyers, tax, labour and other expert.
In particular, due diligence report tackle both finance and tax matters:
1. Tax risks. Results also from Tax due diligence report.
2. Tax losses carried forward. They may correspond to potential tax
savings going forward, depending on the deal structuring. Please note that
Source: Management accounts, KPMG analysis according to accounting standard, it may happen that not all NOLs are
recognized in the balance sheet through deferred tax assets (a portion
can be ‘off-balance sheet’).
3. Other (e.g. VAT, research tax credit, subsidies).
Notes
F. Working capital seasonality adjustment (1/2)
F. Working capital adjustment
Reported and adjusted WC profile
It may happen that the level of cash at year-end (at the Closing date) is
- not representative of an average / normative position.
(10.0)
This can result from various effects, of which:
(20.0)
• Seasonality of the business (e.g. jewelry, ice cream, etc…).
(30.0)
(40.0) • Unusual delay in suppliers’ payment.
(50.0) • Unusual advance cash collection from customers.
(60.0) • Window dressing (especially in case of bank covenants).
(70.0)
• Other effects.
(80.0)
(90.0) As a result, most of SPA includes de Purchase Price Adjustment
mechanism related to Working capital.
(100.0)
The adjustment basically consists in considering the difference between i)
Reported WC Adjusted WC Average LTM WC
the adjusted WC and ii) the Normative WC.
• If Adjusted WC > Normative WC => the difference is cash for the
Source: Management accounts, KPMG analysis Vendor [=> Vendor seeks to decrease Normative WC].
• If Adjusted WC < Normative WC => the difference is debt for the
Difference between WC position and Normative Vendor.
WC position should be considered in Adjusted net debt • The normative WC corresponds usually to the average WC over the
last 12 months; however, different computation exist in practice.
• It can be an amount or a formula to be applied at Closing date.
Notes
F. Working capital seasonality adjustment (2/2)
Monthly working capital
Dec-16 N Feb-17
N-1 Jan-17 N Mar-17
N Apr-17
N May-17
N Jun-17
N Jul-17
N Aug-17
N Sep-17
N Oct-17
N Nov-17
N Dec-17
N Average
In €m Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual LTM Var.
Inventories 11.8 11.7 12.0 11.6 12.6 11.0 10.9 10.5 10.3 11.5 10.5 10.5 12.5 11.3 1.2
Trade receivables 42.9 39.7 43.5 39.8 46.3 42.0 46.2 47.4 47.1 47.3 43.6 44.3 51.6 44.9 6.7
Liabilities (57.6) (54.4) (56.5) (52.4) (53.0) (45.6) (49.4) (50.5) (55.1) (63.2) (54.8) (56.2) (58.8) (54.1) (4.6)
Social debt (32.3) (29.7) (31.0) (30.9) (30.2) (31.1) (32.1) (32.4) (31.3) (31.0) (31.1) (32.3) (29.4) (31.0) 1.7
Fiscal debt 3.6 3.6 4.5 5.5 3.1 3.8 4.0 2.1 1.0 (1.4) (0.5) (2.9) (2.9) 1.7 (4.6)
Rents (2.1) 5.1 1.5 (0.6) 4.3 0.7 1.3 6.0 1.3 (2.4) 5.8 1.0 (4.1) 1.7 (5.7)
Trade WC (33.6) (24.0) (26.0) (27.1) (17.0) (19.1) (19.2) (16.7) (26.8) (39.4) (26.6) (35.6) (31.0) (25.7) (5.3)
Other assets 9.6 9.6 9.6 9.6 11.1 11.1 11.0 11.0 10.9 10.9 10.8 10.8 10.7 10.6 0.1
Other liabilities (19.5) (21.6) (15.8) (16.4) (13.5) (20.4) (20.3) (19.1) (18.4) (18.4) (14.1) (18.7) (16.7) (17.8) 1.1
Non trade WC (43.5) (36.0) (32.2) (33.9) (19.3) (28.4) (28.4) (24.9) (34.2) (46.9) (29.9) (43.5) (36.9) (32.9) (4.1)
WC - as reported (77.2) (60.1) (58.2) (61.0) (36.3) (47.6) (47.6) (41.6) (61.0) (86.3) (56.4) (79.1) (67.9) (58.6) (9.3)
-
Potential adjustments
A. Exceptional items
Adjustment #1 (18.0) (10.0) (10.0) (15.0)
Adjustment #2 20.0 10.0
B. Debt-like / cash-like items
Adjustment #3 (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0)
Adjustment #4 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Total adjustments (1.0) (1.0) (1.0) (1.0) (19.0) (11.0) (11.0) (16.0) (1.0) 19.0 (1.0) 9.0 (1.0)
WC - as adjusted (78.2) (61.1) (59.2) (62.0) (55.3) (58.6) (58.6) (57.6) (62.0) (67.3) (57.4) (70.1) (68.9) (61.5) (7.4)
F. Working capital adjustment (cont’d) ❑ Cash-like and debt-like items booked in Illustrations
Methodology reported WC.
In the table opposite, the difference between
• Obtain the monthly working capital. • Present an adjusted WC. the WC position and the Normative WC is a
debt for the Vendor:
• Reconcile to audited accounts (at least at • Assess the difference between Adjusted
year end). WC and Normative WC. 1. €9.3 million without adjustments.
• Identify potential adjustments, such as:
2. €7.4 million with adjustments (plus debt-like
❑ Exceptional items. and cash-like items to be considered).
Notes
Notes
YOUR KPMG CONTACTS
Vincent Delmas Rémy Boulesteix

Partner, Deal Advisory, Partner, Head of Deal Advisory,
Head of Transaction Services Transaction Services
Tel.: +33 (0)1 55 68 75 02 Tel.: +33 (0)1 55 68 66 90
E-mail: vdelmas@kpmg.fr E-mail: rboulesteix@kpmg.fr
This proposal is made by KPMG S.A. KPMG S.A. is member firm of the KPMG global organization of independent member firms affiliated with KPMG International
Limited (“KPMG International”), a private English company limited by guarantee. The information contained in the present document is valid as at its date of
issuance. They are in all respects subject to satisfactory completion of KPMG's procedures to evaluate prospective clients and engagements, including
independence and conflict checking procedures, and the negotiation, agreement, and signing of a specific engagement letter or contract. There can be no
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. KPMG International and its related
entities provide no services to clients. No member firm has any authority to obligate or bind KPMG International, any of its related entities or any other member firm
vis-à-vis third parties, nor does KPMG International or its related entities have any such authority to obligate or bind any member firm.
© 2023 KPMG S.A., a French audit and accounting limited liability company and a member firm of the KPMG global organization of independent member firms
affiliated with KPMG International Limited, a Private English company limited by guarantee. All rights reserved. The KPMG name and logo are registered
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KPMG - Adjusted Earnings - EV To Equity Bridge

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Adjusted

• Discontinued operations. • Management fees.

REPORTED NET DEBT

ADJUSTED EARNINGS ADJUSTED NET DEBT

MINORITY INTERESTS* PURCHASE PRICE OF MINORITY INTERESTS*

ACQUISITIONS (PRO FORMA) RELATED NET DEBT, EARN-OUT, etc…

KEY TAKE AWAYS

BELOW EBITDA ITEMS SOME RELATED ASSETS AND LIABILITIES

IFRS 16: RENTS CANCELLATION IFRS 16: RELATED FINANCIAL LIABILITIES

NO PROFIT SHARING IN NET DEBT

Note: *Regarding Non-controlling interests, different approaches exist

SOURCES OF FINANCIAL STATEMENTS: SPECIFIC CASES

CATEGORIES OF EBITDA ADJUSTMENTS

Source: Management accounts, KPMG analysis

A. Perimeter adjustments (cont’d)

C. Accounting adjustments (cont’d)

*To be analyzed on a case-by-case basis. Depends also on market practice

100% the ‘ramp-up’ period).

CATEGORIES OF EBITDA ADJUSTMENTS

Source: Management accounts, KPMG analysis

Risks identified by other advisors (especially Tax matters)

Vincent Delmas Rémy Boulesteix

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