FDD Fundamentals
Kick-start your financial due diligence (FDD) career by gaining a detailed understanding of the financial due diligence process and learn how to perform key financial analyses, such as quality of earnings adjustments (QofE), net working capital (NWC) analysis, and identifying debt and debt-like items. Participants work through mini case studies to start getting repetitions on the core FDD Excel-based analyses commonly performed on the job.
FDD Fundamentals Course Overview
FDD Fundamentals has two main components: FDD Analytics and FDD Process. Depending on the experience level and needs of your team, Intro to Financial Accounting Concepts / Financial Accounting Basics and/or Intro to Excel for FDD Professionals can also be added to the course.
FDD Analytics
This course includes individual & group work in Excel, performing common FDD analyses / databook creation. It covers a conceptual review of certain starting point analyses, such as processing, mapping, and trending trial balances; reconciling and cleaning data; and cash proofs. Using mini-case studies exposing participants to a variety of industries and businesses, the course provides learners with hands-on reps on core analyses, including quality of earnings / EBITDA adjustments, NWC analysis, and identifying debt and debt-like items. Other common financial diligence analyses are also covered.
Customer Analysis
- Project Magnolia – Case Introduction
- Best Practices: Creating the Databook (Converting TB into Flat File, Checks, etc.)
- Excel Case Study: Project Magnolia (Customer Analysis)
Quality of Earnings
- Quality of Earnings Comparison of Similar Businesses
- Normalizing Adjustments Review
- Excel Case Study: Project Windmill (Unit Economic Model & PF Earnings Adjustment)
- Participant Earnings Base Negotiation Exercise
- Excel Case Study: Project Magnolia (Quality of Earnings Exercise)
Cash, Debt, & Debt-Like Items
- Review of Debt and Debt-Like Items Schedule
- Excel Case Study: Project Toledo (Debt & Debt-Like Items)
NWC Mechanisms in M&A Transactions
- How NWC Impacts Purchase Price
- NWC as a Purchase Price Adjustment Mechanism
- NWC in Seasonal Businesses
- NWC as the Gas Fueling the Engine / Business
- Three Times When NWC is Commonly Calculated
- NWC Target as Necessary Condition to Evaluate Competitive Offers
- Excel Case Study: Project Empire Records (NWC Adjustments)
- How NWC Targets are Usually Set
- Select Best Practice Tips in Setting a NWC Target: Buy Side vs. Sell Side Considerations
- NWC Improvements as a Value Creation Tool
Determining Adjustments to the NWC Target
- How NWC Targets are Usually Set
- Example Adjusted NWC Schedule from FDD Report
- Determining Adjustments to NWC: Checklist
- Importance of Monthly Consistence in Setting NWC Targets: Example Checks in Transit
- Possible Adjustments: Cash-Free, Debt-Free Concept
- Possible Adjustments: Cash
- Possible Adjustments: Debt (Definitional vs. Debt-Like)
- Possible Adjustments: Gray Area Example–Deferred Revenue
- Possible Adjustments: Income Tax Assets & Liabilities
- Possible Adjustments: Sub-Account Details & Management Fees
- Possible Adjustments: One-Time, Non-Recurring Items
- Possible Adjustments: Accounting Considerations
- Year-end Audit Adjustment Normalization Issues
- Possible Adjustments: Excluded Assets & Liabilities
- Seasonality Impact on NWC
- Negative Net Working Capital Businesses
- Revenue Growth & Decline Impact on NWC
- Excel Case Study: Project Husker (NWC Include/Exclude Activity)
- Adjusted vs. Unadjusted NWC
- Project Based Businesses & NWC: Percentage of Completion Accounting
- Guiding Question to Ask in Determining NWC Adjustments
- NWC Negotiating Tricks & Other Practical Considerations
- Excel Case Study: Project Magnolia (NWC Analysis)
Free Cash Flow
- Analysis of Where the Unlevered FCF Components are Found
- Unlevered vs. Levered FCF
- EBITDA as a Proxy for FCF – Pros & Cons / Accuracy
- Excel Case Study: Project Teddy Bear (Analysis of Capital Expenditures)
FDD Process
This course includes a comprehensive introduction and review to the workflows, processes, timelines, best practices, and tips concerning the typical transaction process and steps through the lens of FDD professionals, covering both buy side and sell side engagement considerations.
FDD Overview
- What is FDD (and What it Informs)
- Main Components of an FDD Report (Quality of Earnings, Analysis of NWC, & Debt & Debt-Like Items)
- FDD Process Overview & Timeline
- Accounting vs. Finance and Audit vs. FDD
- Differences Between Audited Financial Statements & FDD Reports
- Importance of Confidentiality & Non-Disclosure in FDD Work
Getting Clear on Your FDD Job
- What is FDD? Getting Clear on Your Job
- What FDD Professionals Do at the Team / Profession Level
- FDD Engagement Team Responsibilities by Function
- What FDD Professionals Do at the Associate/Sr. Associate Level
- FDD Process / Project Management–A Deeper Look
- FDD Engagement Staffing Model
- Being an Independent, Unbiased Resource While Serving Your Client
- Healthy Professional Skepticism
- Roles & Responsibilities the FDD Job Does NOT Include
Buy Side vs. Sell Side Considerations
- Buy Side vs. Sell Side vs. Carve Out Comparisons
- The Transaction Perimeter
- Databooks vs. Reports vs. Both
- Buy Side vs. Sell Side Considerations–A Deeper Look
- Full Diligence vs. More ‘Phase I’ Type Engagements
- Branded vs. Unbranded Deliverables in Engagements
- What Buy Side & Sell Side Reports Inform
- Carve Outs
Main Components of an FDD Report
- Quality of Earnings (EBITDA Adjustments)
- Analysis of Net Working Capital (“NWC”)
- Identification of Debt & Debt-Like Items (“DDL”)
- Impact of the Main Components on Price & Terms (Trace Back to LOI and SPA)
- Example LOI Excerpts
- FDD Informs Client Perspectives on Free Cash Flow (“FCF”)
- The Primary Goal of FDD
- Core Data Sets: Trial Balances and Transaction Level Databases
- Common Starting Points: Reconciliations & Cash Proof
- Other Common Financial Analyses
- Excel Case Study: Project Lucky Day (Reconciliations)
Private M&A Transaction Considerations
- Why Private M&A Transactions are Normally Cash-Free, Debt-Free
- Public Company vs. Private Company Differences
- Why EBITDA is the Go-To Metric in Private M&A Transactions
- Impact of Financing Decisions
- Enterprise vs. Equity Value
What is EBITDA?
- What is EBITDA?
- EBITDA and Foundational Questions
- Why EBITDA is Go-To Metric in Private M&A Transactions
- Earnings Generating Capacity (“EGC”)
- Normalizing Adjustments – Common Categories / Types of Adjustments
- Normalizing Adjustments – Example QofE Table Conventional Layout
- Excel Case Study: Project Lucky Day (Identifying EBITDA Adjustments)
- FDD Philosophical Approaches to EBITDA Adjustments
- EBITDA as a Proxy for Free Cash Flow
Cash, Debt, & Debt-Like Items
- Cash-Free, Debt-Free Convention
- Definition of Indebtedness from a Purchase Agreement
- Example Debt & Debt-Like Items Schedule
Introduction to Net Working Capital (“NWC”)
- What is Net Working Capital?
- Net Working Capital Example – Beverage Company (PopFizz)
- NWC Cycle / Cash Conversion Cycle
- How Businesses Finance NWC Needs
- NWC Differences by Industry and Company
- NWC Optimization
- Changes in NWC – Sources & Uses of Cash
FDD Process & Timeline
- FDD’s Role in the Deal Process
- Competitive Auction Process vs. One-Off Negotiation
- Phase I (Key Issues) Report vs. Phase II (Full Scope) Report
- Purchase Agreement Assistance
- Process Overview and Timeline
- Typical Milestones & Timing on an FDD Engagement
- Client Internal Processes & Its Impact on FDD Project Timing
Pre-Diligence Activities
- Process Overview and Timeline
- Spinning Up the Engagement
- Receiving Preliminary Information & Completing Foundational Questions
- Understanding the Client’s Investment Thesis
- Creating the Statement of Work (“SOW”) & SOW Best Practices
- Budgeting & Hour Tracking
- Cross-Sell & Up-Sell Opportunities
- Internal Kick-Off Team Meeting
- Working Group List (“WGL”)
- Information Request List (“IRL”)
- IRL Activity, Considerations, & Best Practices
- Common High Priority Data Requests
- Initial Questions List Tips
- Data Flow & Client Communication
Diligence Activities
- Process Overview and Timeline
- Virtual Data Room (“VDR”) Access, Processing, & Best Practices
- Analysis & Databook Creation
- Common FDD Analyses (QofE / EBITDA Adjustments, NWC Analysis, DDL)
- Data Prep & Data Cleaning Tips
- Lead Sheets
- Excel Case Study: Project Lucky Day (Data Scrubbing & Customer Analysis)
- Audit Workpaper Review
- Managing Overseas Resources
- Preparing for the Management Visit
- Meeting Agendas & Question Lists
- Management Visits: On-Site vs. Videoconference
- Management Meetings
- Active Notetaking in Management Meetings & Calls
- Meeting Strategies: How to Approach Questions & Communication Tips
- Meeting Strategies: Team Roles & Responsibilities
- Management Visit Wrap-up & Follow-Up
- Employing Active Listening in Management Meetings & Calls
- Post Management Visit Activities
- Excel Case Study: Project Lucky Day (Recast Financial Statements)
- Important Figures & Metrics to Know & be Able to Recall
Report Production & Delivery
- Process Overview and Timeline
- FDD Report Production & Best Practices
- Distilling the Data & Prioritizing Key Findings
- Report Writing Using an Outline & Identifying Key Themes
- Report Organization: Slide Layout Considerations & Best Practices
- Applying the Pyramid Principle–Do Not Bury the Lead
- Movie Trailer: Getting Across the “So What”
- Writing is an Iterative Process: Tips on Writing FDD Reports
- Keep it Clear & Concise
- Anatomy of an Adjustment Write-up
- Adhering to SOPs to Avoid Unnecessary Rework
- Editing Tips & Best Practices
- Panning Out and Attempting to Bulletproof Your Work
- Interim Updates vs. Final Read-out Calls
- Client Read-Out Calls–Considerations & Best Practices
- Tips on Handling Tough Questions
- Becoming a Trusted Advisor, Not Just a Vendor
Post Diligence Support
- Process Overview and Timeline
- Post Report Assistance
- Incorporating FDD Findings into Client Valuation Models
- Updating the Report / Rolling Forward Data & Analysis
- Completing Calls with Third Parties (e.g., lenders, RWI providers)
- Purchase Agreement Guidance & Post-Close NWC Assistance
- Preparation of Closing NWC Schedule, True-up Calculations, & Advising on Potential Disputes
- Potential Follow-up Work / Cross-Sell Related Services
- After Action Review
FDD Fundamentals Optional Add-ons
- Intro to Financial Accounting Concepts / Financial Accounting Basics
- Intro to Excel for FDD Professionals