Private Equity Firm Re-Trades Deal After Inflated Synergy Assumptions Found
Executive Summary
Illustrative Scenario
This case study is a composite, educational scenario built from patterns commonly observed in financial model audits. It does not describe a specific, identifiable client engagement, and any resemblance to a particular transaction is coincidental.
Background¶
A private equity firm was pursuing a platform acquisition, combining a portfolio company with a target being acquired as a bolt-on. The investment case relied in part on projected cost and revenue synergies between the two businesses, consolidated into a combined pro-forma model built by the deal team's advisors.
The pro-forma model merged two separate operating schedules, one for the existing portfolio company and one for the target, into a combined summary. A dedicated synergies schedule sat alongside both, intended to layer projected cost savings and revenue uplifts on top of the standalone combined figures.
Ahead of finalising terms, the firm commissioned an independent structural audit of the combined model, separate from the commercial synergy assumptions review already conducted by the deal team.
The Problem¶
The combined model showed a healthy uplift in pro-forma EBITDA once synergies were layered in, consistent with the synergy case presented to the investment committee. The deal team's working assumption was that the synergy schedule was additive to the standalone combined figures, as intended.
Rather than accepting that the synergy schedule was additive to the standalone figures as labelled, the audit set out to trace precisely how its outputs flowed into the combined EBITDA figure.
Findings¶
The audit traced the formula chain feeding the combined EBITDA summary cell. A projected procurement cost saving, one of the largest line items in the synergies schedule, was being added directly to the combined EBITDA figure. Separately, the portfolio company's own standalone cost schedule, which fed into the same combined EBITDA figure through a different formula path, had already been updated in an earlier model revision to reflect a lower, post-synergy procurement cost assumption.
The result was a formula error of the double-counting type, described in the Formula Error Types technical guide: the same cost saving was reflected once in the standalone cost base and again as a separate addition in the synergies schedule, inflating combined EBITDA by the value of the overlapping saving.
Root Cause¶
The overlap traced back to the standalone cost schedule being updated by one team member to reflect an already-agreed procurement change, while the synergies schedule, maintained separately by another team member, had not been updated to remove that same line once it stopped being a forward-looking synergy and became a baked-in assumption. The two schedules were never reconciled against each other before being combined.
This is a structural finding: a formula reference overlap between two schedules, not a disagreement about whether the underlying procurement saving was achievable.
Risk¶
Without the audit, the combined pro-forma EBITDA used to support the acquisition price would have continued to overstate the platform's actual post-synergy earnings capacity. Since the price was being negotiated directly off that inflated combined figure, the double-count risked leaving the buyer overpaying relative to the deal's own stated value case.
Resolution¶
Once the deal team reviewed the findings, they reconciled the two schedules and removed the overlapping line from the synergies schedule, since it was already reflected in the standalone cost base. The corrected combined EBITDA figure was materially lower than the original. The private equity firm's deal team used the corrected figure to re-open pricing discussions with the seller before the transaction closed.
Lessons Learned¶
- Synergy schedules that sit alongside, rather than fully integrated with, standalone operating schedules are a recurring source of double-counting in combined models.
- A structural audit that traces formula chains back to source, rather than reviewing summary tabs in isolation, is the reliable way to catch this class of error.
- Reconciling schedules maintained by different team members before combination is a practical governance control worth building into the model build process itself, a theme addressed further in Model Risk.
- Commercial reasonableness of a synergy assumption and structural correctness of how it is calculated are separate questions, both of which warrant independent review.
- Once a deal closes, a finding of this kind shifts from a negotiating lever to a dispute; catching it before signing is what lets the buyer re-trade terms rather than pursue a remedy after the fact.
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Frequently Asked Questions
Is this a real client engagement?
No. This is an illustrative, composite scenario built from patterns commonly observed in financial model audits. It does not describe a specific, identifiable transaction.
What does double-counting a synergy assumption actually mean structurally?
It means the same benefit, for example a projected cost saving, is summed into the combined earnings figure through more than one formula path, once directly and once indirectly through a schedule that already contains it, inflating the total without any single formula being individually wrong in isolation.
How is this different from disagreeing over whether a synergy assumption is achievable?
Whether a synergy is achievable is a commercial judgement question. Whether the model's formulas sum that synergy once or twice is a structural question. This case study addresses the latter, a formula logic error, not a dispute over assumption reasonableness.
What audit stage typically catches this kind of error?
Buy-side due diligence on the combined or pro-forma model, before signing or before a final price is agreed, is the typical stage, since a pro-forma model combining two entities' schedules is where overlapping formula references are most likely to be introduced.
How could this have been caught earlier in the deal process?
Tracing every formula contributing to the combined EBITDA line back to its source cells, rather than reviewing the summary tab in isolation, would have surfaced the overlapping reference before the figure was used to support pricing.
Does a structural audit evaluate whether the synergy assumptions themselves are realistic?
No. That is a commercial due diligence question. The structural audit tests whether the model correctly and consistently calculates the figures it claims to calculate, given the assumptions as stated.
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