CASE STUDY
Savings of more than USD100,000 with
independent, third party assessment
Objectives
Solicit an independent second opinion on their own in-house evaluation due to a lack of in-house capacity and expertise on forest & nature-based projects
Mitigate reputation risks
Results
Uncovered a critical flaw in project’s financial model - a significant double-counting of parts of the management fee which inflated the asking price for the corporate investor
Issue identified as a mitigable risk for our client which implied that their involvement in the project would continue so long as the project acknowledged this was a genuine mistake and took steps to remove the error
Xilva’s Red flag, Risks & Recommendation table is now being used as the basis for discussions to challenge the project financials and set milestones in contracting
Client saved more than USD100,000 from negotiations on the acquisition price
THE CASE
Client X was a European corporation. They were considering acquiring a large forestry carbon project in a Latin American country. The project was a mixed plantation of both native and pine, planting trees and harvesting timber, and the project developer was raising funds to cover deployment and operations for the next 40 years crediting period.
Due to the large sum acquisition cost and a lack of in-house expertise & capacity, X contracted Xilva to provide an independent assessment of the project to identify any delivery risks associated with the project as well as any issues that may have overlooked by the in-house team.
WHAT XILVA GRADE UNCOVERED
While conducting a due diligence on the financial viability of the project, we discovered a double-counting of parts of the project management fees. The project developer had included salaries of the technical staff in the financial model. Simultaneously, they were charging a management fee of over USD295 per hectare per year. This significant double counting unnecessarily inflated the overall asking price.
HOW WE DID IT
As part of the Xilva GRADE process, Xilva team found this double-counting flaw in the financials of the project while assessing the Financial Viability area by:
Conducting a cost and revenue sense check: plausibility examination of the planned project expenses and income streams to ensure that they align with the financial, environmental and social objectives and operation realities of the project.
(On the revenue side) Assessing the reliability and consistency of income streams, and validating that sales forecasts are broadly realistic.
(On the cost side) Evaluating that costs are in line with the objectives and activities proposed, are plausible for the region in which the project takes place, and validating that cost/expense forecasts are realistic.
Cross checking similar projects in the region when we uncovered that in this region, the standard management fee was USD100 per hectare per year, one third of what was proposed to our European client
WHY IT IS IMPORTANT
By including both salaries of the technical staff and a management fee in the Operating Expenses of the project, the double-counting resulted in an inflated asking / acquisition price. With the Xilva GRADE assessment, the European corporation could negotiate down the price and save more than USD100,000.
Learn more about Xilva GRADE, the framework and methodology. Contact us for a free consultation today.