Overview
A US buyer engaged Velonix to perform buy-side Financial Due Diligence and a Quality of Earnings analysis on a Southeast US frozen dessert manufacturer. The target manufactures in-house and distributes across a multi-state footprint through a wholesale channel.
Unlike our white-label outsourcing work, this was a direct advisory engagement. Velonix led the diligence, worked directly with the buyer and issued the report under our own name. The review covered two fiscal years plus year-to-date, delivered in three weeks.
The challenge
The target presented as a stable, profitable owner-operated manufacturer. The buyer needed to know whether reported profitability reflected the economics a new owner would actually inherit, a question that owner-operated businesses rarely answer on the face of the financials.
Owner-operated distortions
Owner-operated businesses commonly carry related-party arrangements, personal expenses, and accounting policies set for the owner's purposes rather than for a buyer's underwriting.
Policy scrutiny
Reported earnings needed to be tested against the accounting policies actually applied, not accepted at face value.
Concentration exposure
A wholesale distribution model concentrates commercial risk in a small number of relationships, an exposure the buyer knew existed but had not seen quantified.
Compressed timeline
Three weeks from kickoff to final report, against a live transaction timeline.
Scope of work
Velonix performed a full buy-side QoE across the review period:
- Adjusted EBITDA bridge and normalization
- Revenue recognition policy review and testing
- Related-party transaction analysis
- Customer and distributor concentration analysis
- Net working capital analysis and NWC peg
- Proof of cash
- Net debt and debt-like items schedule
- AR and AP aging analysis
- Reconciliation to tax filings
- Red-flag analysis and buyer diligence question list
Key findings
Below-market related-party rent: EBITDA overstated
The target operated from premises owned personally by the seller, with rent charged well below market rate for comparable facilities. The effect was to understate occupancy cost and inflate reported profitability throughout the review period. Because a new owner would either renegotiate the lease at market terms or relocate, the arrangement would not survive the transaction. Velonix normalized rent to a market rate, producing a downward adjustment to reported EBITDA. That correction directly lowered the earnings base the buyer would otherwise have underwritten and paid a multiple on.
Revenue recognition
Velonix reviewed the target's revenue recognition policy and tested its application across the review period, assessing whether revenue had been recorded in the correct periods and consistently over time. Where treatment did not align with the underlying commercial substance of the arrangements, the effect on reported earnings was quantified and reflected in the Adjusted EBITDA bridge, with the rationale documented for the buyer.
Distributor concentration: quantified and stress-tested
The buyer was aware the target sold predominantly through wholesale distributors. Velonix quantified the exposure precisely: two distributors accounted for approximately 89% of revenue. Rather than flagging the number and moving on, we stress-tested what it meant, examining the earnings and working capital impact of losing either relationship, the concentration trend across the review period and the contractual protections in place. This converted a known qualitative risk into a quantified downside scenario the buyer could price, structure against and raise directly with the seller.
The outcome
The engagement gave the buyer a defensible analytical basis for its decisions on the transaction:
A corrected EBITDA baseline
A normalized earnings base reflecting the economics a new owner would actually inherit, including the rent correction that reduced reported EBITDA, rather than the profitability presented by the seller.
Post-close cost visibility
A market-rate occupancy figure the buyer could carry directly into its post-close operating model, removing a cost surprise that would otherwise have surfaced after closing.
A priced risk, not a flagged one
Concentration exposure expressed as a quantified downside scenario, giving the buyer a basis for deal structuring and a specific point to negotiate.
Focused negotiation leverage
A red-flag analysis and targeted question list that focused the buyer's remaining diligence and seller negotiations on the issues that carried real economic weight.
Delivered in three weeks, the analysis kept pace with the buyer's transaction timeline without compressing the scope of work.
Why buyers engage Velonix directly
Velonix works both as a white-label extended team for advisory firms and directly with buyers, funds and independent sponsors. On direct engagements, the buyer works with the senior team that performs the analysis, with no layer between the people running the numbers and the people making the decision.
- Owner-operated depth: Related-party arrangements, personal expenses and owner-set accounting policies are where the real adjustments sit, and where generalist reviews miss.
- Transaction specialists: FDD and QoE are our core specialization, not a service line attached to an accounting and tax practice.
- US-market fluency: A licensed US CPA on the team, US-GAAP fluency and a fully US-based client base.
- Deal-pace delivery: Full QoE scope delivered in three weeks, matched to live deal timelines.
- Findings you can act on: Findings are quantified, stress-tested and tied to decisions, not listed and left for the buyer to interpret.
Evaluating an acquisition and need a Quality of Earnings analysis that stands up to scrutiny? Contact Velonix to discuss your transaction.
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