The Transaction Services, Restructuring and Valuation Guide

I. What is Transaction Advisory Services?

Transaction Advisory Services includes a range of consulting services provided in connection with financial transactions, disputes, litigation and restructuring. Transaction Advisory Services firms are generally composed of three main departments:

a. The Transaction Services (TS) Department is responsible for providing financial due diligence

TS teams advise their clients (buyers or sellers) in a transactional context. The company subject to the transaction is analyzed from both an operational and financial perspective, with the results synthesized into a “Financial Due Diligence Report.” This report serves several purposes, such as:

providing a clearer understanding of the company’s financial situation,
identifying potential transactional risks,
providing negotiation points for the transaction price.

Similar to an investment bank acting as an advisor to buyers or sellers, the Transaction Services team can produce due diligence reports for either party.

In all cases, the work will involve:

reviewing the target company’s market
analyzing its historical financial statements,
analyzing its business plan and budget for the current year,
studying the company’s normative situation, including normative EBITDA, WC, and NFD, in order to provide a clearer understanding of the company’s financial state. This work is often used as the basis for valuation exercises, such as applying an EBITDA multiple to the normative EBITDA calculated by the Transaction Services team, or implementing an Enterprise Value – Equity value bridge based on the estimated net financial debt.

b. The Valuation and Financial Modeling Department

The Valuation and Financial Modeling Department is responsible for a variety of valuation missions related to assets or companies, including:

the valuation of companies in the context of a transaction,
the valuation of tangible or intangible assets,
assistance in constructing stock option plans,
The review of asset values in the context of an audit.

In addition, the department may be involved in financial modeling missions, such as:

constructing business plans
reviewing or creating complex financial models for activities such as reporting, business management, investments, and disposals.

c. The Restructuring department

The Restructuring department is the third major department of TAS. It intervenes in the context of company restructuring, turnaround, financial difficulties or when a cash flow concern is anticipated.

Their work mainly focuses on the cash situation of companies. The objective is to help the client optimize cash management, avoid a crisis, or find solutions when it seems inevitable.

II. What are the differences between Transaction Services and M&A?

As previously mentioned, the Transaction Services department is responsible for conducting a financial diagnosis of a company, which provides a better understanding of the financial fundamentals of the target. On the other hand, the M&A department within an investment bank acts as an intermediary for a transaction, putting buyers and sellers in contact, guiding the buying/selling process, and conducting negotiations for its client.

Due to these differences, the TS team is expected to produce an analysis report, while the M&A team is involved in the entire transaction process and may receive a success fee if the operation goes through.

III. The differences between Transaction Services, Valuation and Restructuring. How to choose?

If you are considering which department to choose, it is important to understand the differences between Transaction Services, Valuation, and Restructuring. After having read the presentation of the three departments you might wonder which one would be the best for you. Before we look at the differences, let’s look at the similarities.

These three departments :

Are career stepping stones to Private Equity or M&A. It is true that Transaction Services and Valuation allow easier access to these professions after 2 to 4 years, but Restructuring can more easily open the doors to distressed M&A or turnaround capital.
Allows you to work on a variety of transactions and sectors. These are “deal” professions, and you are exposed to several different missions, companies and sectors. This often provides a good learning curve at the beginning of your career as well as experiences to talk about in interviews.
Requires relatively comparable working hours with peak periods that vary depending on the assignment. We are generally better off than in investment banking on this point.
Generally lead to very similar compensation packages. None of the three is particularly outstanding in terms of salaries or bonuses. On this point, banks and investment funds usually offer more competitive packages.

The major differences between these departments:

In Valuation and Modeling you will spend a lot of time on Excel. Your role will be to value an asset or a company according to different approaches by documenting your method, your assumptions and conclusions. You will also have to create business plans and other financial models. In this sense, this job is well suited to people with a strong taste for Excel modeling or the desire to become an expert in this field. You will certainly go into more detail in modeling and valuation than investment banks or investment funds do.

In the Transaction Services department, you will be responsible for processing raw data (trial balances, audited accounts) to extract insights. You will model much less than in Valuation but will certainly have a better understanding of financial statements. You will be able to make the figures of a company speak more easily and diagnose its state. Finally, you will also (often) have a better exposure to transactions.

Restructuring is a very different activity from the two previous ones since it targets companies in turnaround, in crisis or close to it. At this stage, cash management, debt negotiation and legal implications often take precedence. In Restructuring, you should therefore pay particular attention to cash management and crisis management.

Some independent firms will allow you to handle assignments in more than one of these departments (valuation and transaction services or transaction services and restructuring). Whereas the Big 4 often offer their consultants a 6-month rotation to discover another department of the firm. You can then easily spend 1 or 2 years in one department before asking to discover another one for a semester.

IV. What are the interview questions in Transaction Services, Valuation and Restructuring?

a. Interview questions in TS

In Transaction Services, the interview questions can deal with accounting issues, understanding the financial statements and the links between them. You may also have questions related to normativity adjustments, accounting restatements or certain financial valuation topics. Here is an example of a frequent question:

What would be the impact on the 3 financial statements of a €100 increase in D&A?

At the income statement level:

EBITDA would remain unchanged
EBIT would decrease by €100
Considering a corporate tax rate of 30%, the net income would decrease by 70€.

At the cash flow level , two possibilities:

I consider the EBITDA as the first line of my cash flow statement. EBITDA has not changed. I subtract from it the corporate tax which has decreased by 30€ due to the increase in D&A (30% of 100€ of impairments). The other lines of the cash flow statement remain unchanged so my cash flow increases by 30€.
Second method, I use the net income as the first line of my cash flow statement. This has been reduced by €70. Since there is no cash flow from the D&A, I have to cancel their impact and remove an expense of €100, which adds €100 to my cash flow statement. The other lines remain unchanged and finally my cash flow increases by 30€.

On the balance sheet:

The value of the fixed assets is depreciated by €100
My cash on hand increases by €30
I see a decrease in assets of €70
The equity decreases by €70 due to the decrease in the net income.
I have a decrease in liabilities of €70

b. Interview question in Valuation and Financial Modeling

In the Valuation and Financial Modeling department, you can expect to encounter questions that relate more to the valuation of businesses and assets. There may be some overlap with questions found in Transaction Services.

Here are a few examples:

If you are unable to use the DCF approach, how would you value an industrial machine that is three years old?
How would you estimate the value of the Coca Cola brand (excluding the company)?
How would you estimate the value of a building?

We share the answer to this last question with you. The others are among the many questions covered in our Transaction Advisory Services training.

What is the value of our building?

We can consider a valuation by capitalization or by DCF. Let’s take the Discounted Cash Flow option here.

The preliminary steps to valuation – knowing what we are valuing:

The first step is to visit the building. This step allows for understanding its layout, its location, to know if it is modern or if important works are to be planned.
It is also necessary to know the type of rental spaces (only offices, mixed with residential, etc.)
We will then try to understand the current rental situation of the property (is it fully rented? Partially rented? Is there a significant structural vacancy?)
Once we have gathered enough information on the property as such and on its rental status or, failing that, on its rental potential, we can start our DCF modeling.

In a DCF, we need to define 2 main parameters: the cash flows to be discounted and the discount rate.

Define the cash flows to be discounted from:

The leases received (we will project the future rental cash flows)
Rental estimates for spaces not rented at this stage. We rely on market values that can be obtained from comparable rent data, internal databases, market notes or brokers’ notes.
An estimate of the average vacancy rate, based on historical data or averages observed in the geographical sector and the type of asset. For these vacancy periods, a zero rent flow is therefore projected.
Future cash flow can also be defined on the basis of estimates for example in the case of planned refurbishment works.

Define the discount rate from:

The nature of the asset (only offices, mixed with residential, retail at the foot of the building, etc.)
Its geographical location (an asset in La Défense, in the center of Paris or in a city of 40,000 inhabitants does not present the same level of rental risk)
The condition of the property
On the basis of this information, we can define the discount rate using the notes of real estate brokers/experts (Cushman & Wakefield, JLL, BNP Real Estate, etc.)

We can define the infinite growth rate from the real estate inflation rate.

Now that we have all the input, we can build the DCF model.

c. Interview question in Restructuring

In Restructuring interviews, understanding the connection between financial statements, constructing cash flow statements, best practices in cash management, and knowledge of a company’s legal recourse during financial difficulties are crucial. A potential interview question could be the difference between an ad hoc mandate and conciliation, or recommendations for a company anticipating cash management problems in the next two months or two years.

It is possible to encounter modeling cases in Excel during interviews in these three departments. However, it is unlikely to be questioned about topics such as LBO structuring, investment criteria, or legal frameworks for investment and acquisition operations, as is typical in Private Equity or Investment Banking interviews.

Finally, in Restructuring, the interviews are also very much about the link between the financial statements, the construction of the cash flow statement, the best practices in cash management as well as the main legal recourses of a company in difficulty.

An example of a question in Restructuring:

What is the difference between an ad hoc mandate and conciliation?
What recommendation could you make to a company that anticipates cash management problems over the next two months? Over the next 2 years?

A final point on these 3 departments

It is possible to encounter Excel modeling cases during interviews in these three departments. On the other hand, unlike interviews in Private Equity or Investment Banking, it is quite unlikely to be asked about the structuring of an LBO, the criteria for an investment or the legal framework of an investment / acquisition operation.