🌟 Hello, Reader

Welcome to another edition of Double Klick, your bi-weekly briefing on M&A, finance, and AI innovation.

Let's dive into today’s learning.

Warm regards,
Kapil Sukhija
Founder, KSMC

📊 Deal Strategy Deep Dive

Cracking the Code: Revenue and Margin Analysis in Financial Due Diligence

In our last issue, we explored working capital pegs and debt-like items. This issue examines revenue and margin quality—the bedrock of any Quality of Earnings (QoE) analysis and the primary driver of enterprise value.

What This Means: Revenue and margin analysis evaluates not just how much a business earns, but how reliable, repeatable, and profitable those earnings really are. It dissects revenue drivers (price, volume, mix), customer and product economics, and cost structures to identify normalized earnings.

The Challenge: Reported sales growth and margins often mask underlying fragility. Common issues include:

• One-off or COVID-era spikes that inflate revenue and margins

• Aggressive revenue recognition (early cut-off, bundled contracts, "book-and-bill" practices)

• Margin erosion hidden by mix shifts, discounting, or under-accrued costs

• Poor data quality and inconsistent segment reporting, limiting insight into true drivers

Why It Matters (and How It Impacts Valuation): Valuation in deals is usually anchored on a multiple of normalized EBITDA. If revenue is less recurring than presented or margins are overstated, normalized EBITDA comes down—and every turn of the multiple compounds that value impact.

Beyond the level of EBITDA, quality of revenue and margins affects the multiple itself:

• Higher recurring, contracted, diversified revenue and stable margins support a higher multiple (lower perceived risk)

• Customer concentration, volatile margins, or weak pricing power push multiples down as investors price in higher risk and volatility

In effect, revenue and margin analysis influences both sides of the valuation equation: the normalized earnings, and the multiple (risk and sustainability).

What Does the Financial Due Diligence Analyze?: A robust due diligence systematically dissects revenue and margins through the following lenses:

• Revenue breakdown by source

  • By customer, product/service, channel, geography, and contract type​

  • Discontinued products/services: Revenue phasing out or discontinued lines excluded from run-rate calculations to avoid overstating future performance

• Revenue recognition

  • Recurring vs. non-recurring vs. one-time or project-based revenue

  • Revenue recognition policies vs. applicable accounting standards and industry norms​

• Margin analysis and sustainability

  • Gross margin by product, customer, and channel, including trend and mix impacts

  • Contribution margin by business line and impact of discounting, input costs, and FX​

• Concentration and dependency

  • Top customers, top products, key suppliers, and the sensitivity of margins to changes in any of these​

• Pro forma and normalization

  • Pro forma revenue adjustments: For recent acquisitions, new contracts, or operational changes, presented “as if” they occurred in prior periods (e.g., integrating acquired revenue streams or reflecting new product launches retroactively)

  • Period-on-period bridges of revenue and EBITDA (volume, price, mix).​

  • Adjustments for non-recurring items, accounting policy changes, and run-rate changes to arrive at normalized EBITDA

Real Deal Context: During a sell-side due diligence for a commercial services company, our analysis revealed significant revenue and outsized margins from COVID-related supplies (hand sanitizers, disinfectants, etc.) during peak pandemic months.

We adjusted reported revenue by removing these non-recurring sales and the associated margins from the normalized run-rate, thereby presenting a credible view of underlying performance.

Deal Mechanisms to Address Revenue and Margin Issues: When revenue or margin risks are identified, common deal structuring mechanisms include:

• Purchase price adjustment (PPA)

  • Upfront price reduced or adjusted via closing accounts or working capital mechanisms to reflect a lower or more volatile EBITDA base

• Earn-outs and reverse earn-outs

  • Part of the consideration made contingent on achieving agreed revenue, EBITDA, or margin targets post-close

  • Reverse earn-outs reduce price if performance falls short, protecting the buyer against downside​

• Escrows and holdbacks

  • A portion of the price is held in escrow to cover identified risks (e.g., disputed contracts, key customer renewals, or cost understatements that could hit margins)

• Specific indemnities and covenants

  • Targeted indemnities for known revenue recognition issues, disputed contracts, or pricing commitments.

  • Operational covenants to protect the integrity of earn-out metrics where the seller remains involved post-close

These tools allow parties to share risk around uncertain revenue and margin outcomes instead of walking away from the deal.

Are You Prepared? If you are contemplating a transaction or want a pre-diligence ‘health check’ around your business, we would be happy to discuss.

🌍 Global Pulse

Energy, Utilities, and Mining Lead 2025 M&A Activity

The Canadian M&A market closed 2025 with exceptional strength, posting US$389.69 billion in total deal value—a US$118 billion increase over 2024. The story was megadeals over volume, with billion-dollar transactions accounting for US$321.9 billion and 78 deals compared to 54 in 2024.

Energy, utilities, and mining dominated with US$195.48 billion—over half of total Canadian M&A. Utilities deals rose 82% year-over-year, energy jumped 257%, and mining increased 220%, reflecting intense demand for infrastructure supporting digital transformation and AI.

Key Sector Highlights

• Infrastructure and Energy: Digital infrastructure drove major deals including Ovintiv's US$3.8 billion NuVista acquisition, EIG's MidOcean Energy acquiring 20% of PETRONAS' Canadian assets, and KKR's US$1.25 billion TotalEnergies solar portfolio purchase. The federal Major Projects Office launch signals policy support for infrastructure acceleration

• Mining and Gold: Gold deal value tripled, with eight US$1 billion+ transactions versus one in 2024. North American metals and mining M&A surged 139%, driven by critical minerals demand for energy transition and supply chain security

• Cross-Border Activity: Inbound M&A doubled to US$98.45 billion with 16 billion-dollar deals, demonstrating international confidence in Canadian resources despite economic uncertainties

• Mid-Market: Deals totaling US$41.56 billion exceeded 2024, led by mining (US$10.58 billion, 54% gold), financial services, and software. Defence and dual-use technology emerges as a 2026 watch sector

Challenges And Evolution

Dealmakers navigate heightened regulatory scrutiny under amended Investment Canada Act provisions, tariff uncertainty, and geopolitical volatility through sophisticated structuring and new risk protections.

Private credit has become a permanent M&A financing fixture, with hybrid structures—senior bank facilities plus private credit mezzanine—now standard in mid-market transactions. This evolution provides flexibility beyond traditional bank constraints and will continue driving 2026 activity as rates improve.

Read the full article here.

🤖 AI Tools Spotlight

Kin – Your Private, Emotionally Intelligent Board of Advisors

In today's high-pressure business environment, professionals need more than just productivity tools—they need trusted advisors who understand their unique challenges and help them navigate complex decisions with confidence.

What The Tool Does? Kin is a privacy-first personal AI that functions as your board of advisors, offering five distinct AI experts—each specialized in different aspects of professional and personal life. Unlike generic AI assistants, Kin builds deep, long-term memory of your context, preferences, and goals while keeping all your data encrypted and stored locally on your device. These AI experts are:

• Sage (Work & Career): Makes strategic decisions with conviction and turns ambiguity into actionable steps

• Harmony (Relationships & Communication): Handles difficult conversations and creates clarity without breaking trust

• Aura (Values & Meaning): Aligns choices with core principles for clearer direction

• Pulse (Sleep & Energy): Optimizes time, body, and energy for sustainable performance

• Ember (Social & Network): Transforms connections into momentum and maintains professional relationships

Why It Matters?: Unlike therapy or traditional coaching, Kin provides on-demand, confidential support whenever you need it, learning from every interaction to offer increasingly relevant insights. Kin's local-first, encrypted approach means one can discuss sensitive business strategies, client situations, or personal challenges without worrying about data leaks or corporate surveillance.

Explore the tool here.

💭 Dealmaker’s Quote

“Life is like riding a bicycle. To keep your balance, you must keep moving.”

— Albert Einstein

🏢 About Us

KSMC is a Toronto-based boutique advisory firm founded by Big 4 alumni driven by an entrepreneurial and innovative vision. We provide comprehensive M&A Advisory Services, strategic CFO Consulting, and tailored Accounting Solutions. Our expertise and network spans the complete transaction lifecycle—from financial due diligence (QoE reviews) and business valuations to full sell-side mandates—serving middle-market clients across industries in Canada, U.S., UAE, India, Puerto Rico, and Botswana.

Know more and reach out to us here.

Disclaimer: This newsletter is provided for informational purposes only and does not constitute any form of advice. We do not have any sponsorship, affiliate, or commercial arrangements with any companies, tools, or services mentioned in this newsletter. All examples and case studies are based on publicly available information and are included for educational purposes only.