A transfer pricing assist helps multi-entity PE firm grasp value in its organization

Case study The situation A growing company
Calculator Money on TableThis privately funded U.S.-based private equity firm, which buys, operates and then sells companies, had recently acquired a company with several U.S. entities and a Canadian operation, and wanted to be sure it had proper transfer pricing policies in place. As part of the transfer pricing review process, the Grant Thornton LLP team got to know the overall business of the acquired company and its eight U.S. entities and their Canadian-related party. The team’s transfer pricing recommendations and guidance led management to re-evaluate its financials and gain a truer view of the value within the entities that make up the acquired company.

Part of the issue for the acquired company, which had revenue of about $150 million, was that it continued to let each entity operate its own way. It had never taken a more in-depth look at what was going on. While financials were primarily consolidated on the U.S. side, a number of the entities were operationally distinct — and the company’s management was making decisions on how to treat those entities based on certain entity-level financials. The firm realized through discussions with Grant Thornton that it could better align the acquired company and make management decisions if it changed the way the entities interacted financially.

The challenge Align expenses with work
To understand where true value was being driven among the operating entities, Grant Thornton took a broad look at headquarter cost allocations and where costs, such as the expenses of key personnel, were being distributed.

For example, the acquired company was one of the major suppliers of wooden truck flooring. Among the eight entities, one of them manufactured cabinets for commercial use (unrelated to the trailer flooring supply). A 40% owner and senior executive of the cabinet manufacturing entity was a senior executive of another entity. He was also on the payroll of a flooring entity, but he spent a significant amount of time overseeing the development and operations of the cabinet entity. In a sense, the flooring entity was subsidizing the cabinet entity’s activities. The cabinet entity would be less profitable if it had his expenses on its books, yet that arrangement would present a truer view of how much money the cabinet entity was bringing to the overall operation of the acquired company.

What the team did Create more bang for the buck
As the team came to understand the inner workings of the overall business of the acquired company as part of its initial transfer pricing work, it saw that a number of intercompany transactions were not being properly handled from an economic perspective. Internal areas could be tightened and aligned differently to reflect true costs and benefits. Grant Thornton conducted an operational assessment of the company’s structure of cross-charges, modeled the current structure to show weaknesses and then created a model of the recommended structure, so that the firm’s management could concretely see the impact on financial outcomes of moving toward better alignment.

Outcome Compliance and profitability
Grant Thornton assisted the firm with putting policies and procedures in place to bring the acquired company into transfer pricing compliance. The team also modeled how to properly price internal intercompany activities to give the firm’s management a truer view of how value was created in the overall organization. The team worked with the firm to put together a presentation to key senior leaders of the acquired company so that they would understand what the issues were, why change was needed and how to accomplish it, and their role in that implementation.

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