Case Study: Special Purpose Financial Statements for a PE Acquirer’s Carve-Out Due Diligence
Rebuilding standalone financials for an unreported division and validating Rs 62 crore of revenue
Executive Mandate Summary
Key Transaction & Governance Challenges
- •The division had never been reported separately, with no standalone P&L, balance sheet or cash-flow statement.
- •The division shared factory space, employees, ERP infrastructure, bank accounts and corporate overhead with other divisions.
- •The seller reported Rs 68 crore of divisional revenue, but Rs 6 crore related to shared customers where attribution could not be independently established.
- •Factory rent, HR, administration, technology and corporate costs had to be allocated using an agreed methodology.
Northrop Execution Architecture & Methodology
Section 1 - The Central Issue
The PE fund was evaluating the acquisition of an industrial automation division that had never operated independently. Revenue and costs were embedded within the parent company, preventing the buyer from assessing the division on a standalone basis.
The seller attributed Rs 68 crore of revenue and Rs 12.2 crore of EBITDA to the division.
Section 2 - Reconstructing Revenue
Northrop classified three years of sales invoices using product codes, customer contracts and dispatch records.
This established Rs 62 crore of verifiable revenue. Rs 6 crore of contested shared-customer revenue was excluded because the supporting documentation did not permit clean divisional attribution.
Section 3 - Allocating Shared Costs
The engagement established predefined methodologies for allocating factory rent, HR, administration, ERP, power and corporate overhead.
The approach was agreed between buyer and seller before the calculations, providing a common framework for the carve-out financials.
Section 4 - EBITDA Normalisation
The seller's Rs 12.2 crore EBITDA was reduced by the impact of disputed revenue, additional shared overhead and related-party procurement pricing.
The resulting standalone EBITDA was Rs 8.7 crore, representing a 14% margin.
Verifiable Institutional Outcomes & Value Realized
- Seller claim of Rs 68 crore reduced to Rs 62 crore of verified divisional revenue.
- Reported EBITDA of Rs 12.2 crore reduced to Rs 8.7 crore after normalisation and allocation adjustments.
- The Rs 3.5 crore EBITDA difference represented Rs 24.5 crore of purchase-price impact at the stated 7x multiple.
- The PE fund renegotiated the acquisition price from Rs 85 crore to Rs 62 crore.
Gopal Banka
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