Intercompany transactions distort standalone earnings. Learn how FDD teams identify, challenge, and adjust for related-party activity in a QoE analysis.
When a business operates as part of a larger group — or when a private owner routes transactions through related entities — intercompany transactions can materially distort the standalone earnings profile. Identifying and adjusting for these is a key part of any quality of earnings analysis.
A buyer is typically acquiring a standalone business (or carve-out) and needs to understand what the normalised earnings of that entity look like on an arm's length basis. Intercompany transactions create distortions in several directions:
None of these automatically represent fraud — many are entirely normal business practices within a group structure. But they must be unwound for the buyer to understand what they are actually buying.
Parent companies frequently charge subsidiaries for shared services — IT, HR, finance, legal, procurement. In FDD, the questions are:
The result is typically a pro-forma adjustment to reflect a realistic standalone cost base.
Where the target sells goods or services to other group entities, the pricing may not reflect what an external customer would pay. A seller-side team may argue the revenue is real and recurring; a buyer will test whether the volume and pricing are genuinely arm's length.
The opposite is also possible: a target may receive goods or services from group entities at preferential pricing. Post-acquisition, these terms may change.
Intercompany loans between group entities are typically removed from the working capital and net debt analysis, as they will be repaid or forgiven at completion. However, associated interest income or expense in the P&L needs to be adjusted out.
In owner-managed businesses, remuneration drawn by the owner (salary, dividends structured as salary, benefits) is a form of intercompany or related-party transaction. Normalising owner remuneration to a market-rate management salary is one of the most common QoE adjustments.
It is common for owners or parent companies to own property that the target rents at below-market or above-market rates. The FDD team will obtain a market rent estimate and adjust accordingly.
In the QoE section of the FDD report, intercompany adjustments are typically presented as pro-forma items — reflecting what the normalised cost or revenue base would look like on a standalone basis. Each adjustment should be supported by evidence of the market-rate equivalent and, where possible, confirmed by third-party data.
Pro-forma adjustments, including intercompany and related-party items, are among the trickier adjustment categories in a real transaction. Our programme works through 8+ realistic case studies with over 150 EBITDA adjustment examples so you can handle them confidently. One payment of €119.99.
Hundreds of candidates prepared their interviews with this programme. Those who landed the role have one thing in common: they worked the cases before walking into the room.
