A private equity firm engaged us to conduct financial due diligence on a potential investment opportunity in a retail and experience-based company. The objective was to assess the company’s financial health, operational efficiency, and long-term sustainability to determine its viability as an investment target.

Challenge

Our due diligence identified several key financial and operational challenges: • The company required a 30% increase in gross profit to achieve profitability, an unlikely outcome given the current economic climate and declining retail spending. • An increase in working capital was necessary to sustain operations until revenue growth could cover expenses. • The company’s net asset position had stabilised over the past three years, but total assets had gradually declined, particularly current assets like cash equivalents, affecting its ability to meet short-term liabilities. • Inventory comprised 46% of current assets in FY 2024, with a declining stock turnover ratio from 2022 to 2024, indicating slow-moving stock and potentially overstated current asset values. • Intellectual property represented 94% of non-current assets and 40% of total assets, valued at $579,666 in 2020, but had not been independently reassessed for impairment. • The company’s total liabilities had decreased, but profitability remained elusive. • Aged payables showed $83,980, with 28.25% overdue by more than two months, while aged receivables totalled $74,983, with 10% overdue by more than 60 days. • Outstanding debt of $92,715 was being repaid at $7,500 per month for 26 months, impacting future cash flow projections.

Solution

Our team performed an in-depth financial analysis and operational review, including: • Independent financial modelling and cost-benefit analysis to evaluate the feasibility of achieving profitability. • Assessment of working capital requirements to sustain operations. • Identification of inefficiencies in inventory management, recommending an ABC analysis approach to optimize stock levels. • Review of intellectual property valuation and recommendations for an independent reassessment to determine any impairment risks. • Evaluation of payables and receivables to improve cash flow management and reduce overdue balances. • Market research to explore opportunities for revenue diversification and cost efficiencies. • Board composition analysis, revealing gaps in Finance/Economics, Law, and Technology expertise, with recommendations to prioritize the recruitment of directors with retail experience and turnaround management skills. • Assessment of current pricing and commission structures, which were insufficient to cover costs, with recommendations to restructure pricing models. • Review of the company's marketing strategy, highlighting the need for enhanced data-driven decision-making and cost control on loss-leading products.

Outcome

Results Our due diligence revealed that: • The current business and operating model did not support immediate investment. • The company required additional capital to remain solvent, with potential funding sources totaling $450,000, extending the operational runway to October 2025 if secured. • Key financial and operational risks needed to be mitigated before investment consideration, including profitability challenges, inefficient stock management, and weak financial governance. • Competitor analysis indicated growth opportunities, particularly in targeting new demographics, such as cruise ship tourists. Recommendations 1. Conduct a pricing review to ensure commissions cover overhead costs. 2. Consolidate product and experience offerings to focus on high-margin items. 3. Implement a chatbot for basic customer inquiries to improve operational efficiency. 4. Strengthen financial governance by appointing directors with Finance, Law, and Technology expertise. 5. Improve inventory management through automation and ABC analysis. 6. Enhance marketing strategies using data-driven insights to optimize customer engagement and sales conversion. Conclusion Based on our findings, we advised the private equity firm that an investment in the company was not viable at this stage. While there were potential growth opportunities, significant financial and operational restructuring was required to ensure long-term sustainability and profitability. As a result, we recommended deferring investment until key strategic initiatives were implemented and financial performance improved.