If you are evaluating an acquisition in the Indian mid-market ($10M - $100M EV), you already know the Confidential Information Memorandum (CIM) is a marketing document. The "Adjusted EBITDA" presented by the sell-side advisor is often optimized to the point of fiction.
Your objective isn't just to verify the bank balance. It is to answer three questions that directly impact your valuation model:
- Is the EBITDA sustainable? (Quality of Earnings)
- How much cash is trapped in operations? (Net Working Capital)
- What liabilities are off the books? (Debt-like Items)
At Finova Consulting, we don't just run a checklist. We execute a forensic validation of the target's financial health. Here is our grounded, phase-by-phase engagement workflow.
Phase 1: The Setup & Data Ingestion
Speed matters, but precision matters more. We deploy our team within 48 hours of the Engagement Letter (EL) signing. Our first 72 hours are critical:
We don't accept "dump folders." We issue a structured Request List (RRL) customized to the target's industry (SaaS vs. Manufacturing). We map the Trial Balance (TB) to the Management Accounts (MIS) to ensure the base data ties out. If the TB doesn't tie to the audited financials, we stop and flag a data integrity risk immediately.
Phase 2: Quality of Earnings (QoE)
This is the core of our work. We bridge the gap between "Reported EBITDA" and "Adjusted EBITDA." This isn't about accounting policy; it's about economic reality.
Revenue Recognition (The "Cut-Off" Test)
In Indian startups, revenue is often recognized aggressively. We perform a granular Proof of Cash revenue test:
- SaaS/Subscription: We recalculate Deferred Revenue waterfalls. Are they recognizing annual contracts upfront? We reverse this to align with service delivery.
- Service Business: We inspect "Unbilled Revenue." Is it truly unbilled work, or is it a bad debt masking as an asset?
Expense Normalization
We normalize the P&L to reflect the post-transaction cost structure. Common adjustments we identify in Indian targets:
Common EBITDA Adjustments:
- Founder Compensation: Adjusting below-market salaries to market rates (negative adjustment).
- Personal Expenses: Removing personal travel, vehicles, and "consulting fees" paid to relatives (positive adjustment).
- Capitalized Opex: Reversing R&D or marketing costs that were aggressively capitalized to boost EBITDA (negative adjustment).
Phase 3: The Working Capital "Peg"
The Purchase Price is typically "Cash Free, Debt Free," assuming a "normal" level of Working Capital. If you don't set the NWC Peg correctly, you will fund the target's operations on Day 1 out of your own pocket.
We analyze the trailing 12-month (TTM) average NWC, but we adjust for seasonality and one-offs:
- Receivables Aging: We diligently provision for debtors >180 days. In India, recovery after 6 months is statistically low.
- Inventory Analysis: We attend the physical stock take (if applicable) and identify slow-moving SKUs that are effectively dead stock.
- Payables Stretch: Has the target delayed vendor payments to artificially boost cash before the deal? We normalize DPO (Days Payable Outstanding) to historical averages.
Phase 4: Debt & Debt-Like Items
Financial debt (Bank Loans) is easy to find. We hunt for "Debt-Like Items"—liabilities that act like debt and should be deducted from the Enterprise Value dollar-for-dollar.
| Category | What We Look For | Impact |
|---|---|---|
| Employee Liabilities | Unfunded Gratuity, Leave Encashment, Accrued Bonuses not yet paid. | Deduction from EV |
| Tax Exposure | Disputed GST credits, Pending TDS demands, aggressive transfer pricing positions. | Indemnity or Escrow |
| Deferred Consideration | Earn-outs from previous acquisitions or deferred capex payments. | Deduction from EV |
Phase 5: Indian Statutory Nuances
Compliance in India is binary: you are either compliant or you are liable. We perform specific statutory reconciliations:
- GST Reconciliation: We match GSTR-3B (Returns) vs. Books vs. GSTR-2A (Input Credit). Mismatches here lead to direct cash outflows post-acquisition.
- PF & ESI: We verify if the target is compliant with Provident Fund regulations, specifically regarding the definition of "Basic Salary" (The Supreme Court ruling impact).
The Deliverable: Not Just a Report
We don't just send a PDF. We equip your deal team with:
- EBITDA Bridge: A waterfall chart showing Reported EBITDA → Management Adjusted EBITDA → FDD Adjusted EBITDA.
- Net Debt Statement: A definitive list of all items to be subtracted from the Purchase Price.
- SPA Schedule: Specific representations and warranties we recommend based on our findings.
Recent Engagement Highlight
Target: ₹80 Cr Revenue Logistics Tech Co.
Issue: Target capitalized 100% of their "implementation team" salaries as Software Development (Capex).
Finova Finding: We reclassified these as Opex, reducing EBITDA by ₹4.2 Cr.
Result: Client re-traded the valuation, saving ₹32 Cr on the final deal price (at 8x multiple).
Verify Before You Verify
Trust the deal, but verify the data. Our forensic team is ready to deploy within 48 hours to support your transaction.
Request a Confidential FDD Proposal
Founder of Finova Consulting. Ankit specializes in Transaction Advisory and Forensic Diligence for mid-market M&A in India. He advises PE funds and Corporate Acquirers on valuation, QoE, and deal structuring.