Financial due diligence example: retesting a seller's quality of earnings

Ironvale Digital Infrastructure, a data center operator with six campuses and 202 MW leased, is for sale. The seller’s draft QoE says FY25 adjusted EBITDA of $224.0 million is supported and net debt and debt-like items are $1,506.9 million. Financial due diligence is the buyer’s work to test those numbers against the primary records before the bid: the audited accounts, twelve months of management accounts, the billing and invoice exports, the meter data, the credit agreement and the construction budgets.

The buy-side work changes five things:

• Buy-side adjusted EBITDA is $206.9 million, $17.1 million below the seller. $8.9 million comes from the add-back tests on the adjusted EBITDA page; the other $8.2 million is power the company buys but does not recover from tenants, which the ledger hides by booking power cost equal to the reimbursements every month.
• The billing ledger is not an invoice record. It equals GAAP lease revenue to the dollar, and every lease in it moves by the same percentage each January, whatever its escalator date. A further $3.9 million of FY25 rent is at risk until the seller reconciles billing to the leases.
• Net debt and debt-like items are $1,584.0 million, $77.1 million above the seller. The QoE keeps $57.6 million of payables out of working capital but carries only $12.9 million of them as debt-like.
• Receivables exceed open invoices by $17.7 million at year end, so the proof of cash in the QoE, 97.6% cash conversion, is an identity on the cash flow statement rather than a test of collections.
• The developments need $372 million more than the construction facilities can fund, a sources-and-uses item the QoE understates by quoting the March 2026 figure as December’s.

At an illustrative 22.0x, the EBITDA and net debt findings are worth about $453 million of equity value.

The due diligence request list

The follow-up request list to the seller has 46 requests in seven workstreams; 29 are high priority because they decide whether $8.2 million of EBITDA, $3.9 million of rent and $77.1 million of net debt items stand.

Every open item on this page has a request behind it, and the list adds the standard requests a buyer makes at this stage: trial balances, audit letters, bank statements, agings, the top tenants’ leases, tax returns and the change-of-control schedule. Most requests go to management; the QoE provider answers for its own bridge and working capital schedule, and counsel for the litigation, the facility agreements and the consents.

Does the QoE tie to the accounts?

Every line of the QoE’s FY25 income statement agrees to the audited accounts and the Excel statements, and to the twelve monthly management accounts but for $0.1 million of other income. What does not tie is what the QoE leaves out.

• The databook skips other income. Appendix A runs from NOI less G&A, $212.8 million, straight to $224.0 million of adjusted EBITDA. The $11.2 million in between is other income, including $3.2 million of interest on cash and $2.2 million of power-contract settlements.
• Earlier years need plugs. Adjusted EBITDA of $139.0 million in FY23 and $178.0 million in FY24 sits $2.8 million and $2.2 million above what the audited lines and the disclosed non-recurring costs support. The QoE presents the difference as “management adjustments (net)” without itemizing it, which flatters the FY23-FY25 growth rate.
• The working capital table does not use the balance sheet. It takes $31.6 million of receivables against $34.2 million audited and $38.7 million of payables against $96.3 million. The balance falls into neither working capital nor net debt, which the net debt section takes up.

The earnings base. The add-back tests on the adjusted EBITDA page take the seller’s $224.0 million to $215.1 million ($226.7 million LTM March 2026). The one EBITDA finding this page adds is power, below: with it, buy-side adjusted EBITDA is $206.9 million in FY25 and $217.9 million LTM, and $198.5 million on a cash basis after straight-line rent.

Quality of revenue

Lease rent is 74% of revenue and the QoE calls metered power a pass-through at cost. The meter data says the company absorbs about $8.2 million of power a year.

The QoE’s case for revenue quality rests on two claims: contracted rent with 2.5-3.0% escalators, and metered power rebilled to tenants at cost. Both were tested against the primary records rather than the management summaries.

Metered power

The general ledger books power cost equal to reimbursement revenue for every campus in every month, so it shows no margin and no shortfall. The billing export bills a nearly flat $6.8-7.2 million a month; the ledger recognizes a summer peak of $9.8 million in July. They agree only in the annual total. The interval meter file prices FY25 facility consumption, 1,657 GWh, at $92.4 million, and its own note says the difference to the $84.2 million recovered “reflects house loads, vacant capacity and gross-up caps absorbed by the Company.” That is 128 GWh, 7.7% of facility energy, that no tenant pays for, and an $8.2 million cost shortfall, 9.7% of power reimbursements. The $8.2 million is provisional: it uses blended utility rates and needs the utility invoices to confirm.

Billing against the leases

Contract escalators in the rent roll are 2.5-3.5% a year on each lease’s own anniversary, and in every month except January only the 18 to 26 leases on their anniversary change. In January every lease moves together: down 1.8% in 2024, up 9.3% in 2025 and up 3.0% in 2026. Together with base rent that equals GAAP lease revenue to the dollar in every year, straight-line rent included, the export reads as revenue allocated to leases, not as invoices.

On the 139 leases in place all of FY25, ledger rent is $291.2 million against $279.3 million of rent-roll contract rent, and the rent roll agrees with the rent tenants certified in all 12 signed estoppels tested. Straight-line rent explains about $8.0 million of the $11.9 million gap; the remaining $3.9 million in FY25, and $8.6 million LTM after the January 2026 step, is at risk until the seller produces a lease-by-lease billing reconciliation. It is not deducted from buy-side EBITDA.

Concentration

The three hyperscale tenants are 56.0% of contracted rent, as the QoE says; the top five are 59.4% and the top ten 63.9%. The next largest tenant is 2.1%.

Tenant cohorts, churn and retention

The tenant base is sticky: 97.8% of FY25 opening MW stayed and 98.4% of tenants stayed. The seller’s 91% is a renewal rate on the leases that expired, not portfolio retention.

The cohort analysis groups tenants by the year of their first lease and uses the tenant data, the churn detail and the invoice register, not the billing export. There are only three years of history, so the pre-2023 cohort mixes first leases from 2017 to 2022.

Tenants signed before 2023 billed 86.1% of FY25 base rent; the three newer cohorts added $42.3 million.

On the whole portfolio, 97.8% of opening MW stayed in FY25, against the 91% renewal rate the seller presents as retention.

• Growth comes from the existing base. Tenants signed before 2023 billed $262.7 million of FY25 base rent, 86.1% of the total; the 2023 to 2025 cohorts added $42.3 million. Net revenue retention was 120.4% in FY25, driven by hyperscale expansions and the ramps of new tenants.
• Revenue retention is overstated by the same January steps. For tenants whose contracted kW did not change, billed rent rose 10.2% in January 2025 against 2.5-3.0% escalators, and the invoice register equals GAAP lease revenue to the dollar just as the billing export does. Measured in MW, net retention was 99.2%; the MW figures do not depend on billed rent.
• FY25 churn of 4.2 MW is 2.2 MW of lost tenants and a 2.0 MW downgrade. Two colocation tenants left, 1.4 MW at CMH I after the parent’s insolvency and 0.8 MW at NOVA I; the hyperscale tenant at ATL I did not renew 2.0 MW but stays at 24.6 MW elsewhere. The QoE describes the colocation losses as 1.2 MW at DFW I and 1.0 MW at NOVA I, “both re-leased”; the CMH I suite is still in proposals.
• The seller’s retention figure answers a narrower question. The QoE’s 91% is 42.5 MW renewed over 46.7 MW expiring. On the whole portfolio the same year’s loss is 2.2% of opening MW, which is the 97.8% above; neither the CIM nor the QoE states a net revenue retention. The CIM’s 24 new colocation logos in FY25 compare with 19 tenants whose first lease began in 2025.

Proof of cash

The QoE’s 97.6% cash conversion recomputes, but it is arithmetic on the audited cash flow statement. On the invoice register, 95.9% of FY25 billings were collected by year end and all of them by March 2026.

Collections are clean: no FY25 invoice was open at March 31, 2026, and none was paid more than 35 days late. The gap is in the balance sheet. Receivables of $34.2 million at year end have only $16.5 million of open invoices behind them, and $10.9 million is still unexplained at March 31. The difference is unbilled revenue, managed services (billed outside both exports) or something else, and it matters twice: for revenue recognition and for the working capital peg. The ledger and the register also hold no credit notes at all, although the company reports $0.19 million of SLA credits in FY25.

Net debt and debt-like items

Buy-side net debt and debt-like items are $1,584.0 million at December 31, 2025, $77.1 million above the seller’s $1,506.9 million, and $1,648.0 million at March 31, 2026.

• $44.7 million of payables falls between working capital and net debt. The QoE excludes $57.6 million of payables and accruals from working capital, but carries only retentions, the litigation accrual and severance, $12.9 million, as debt-like. The remainder is construction payables and other accruals, including accrued interest, of $34.1 million (a residual to confirm in Q&A), the $9.4 million FY25 bonus paid in March 2026, and an assumed $1.2 million of unpaid adviser and transaction costs. Each is a cash cost for work or service before closing.
• Tenant deposits and non-current deferred revenue are cash the company holds and owes back to tenants or in service. In a cash-free sale the seller keeps the cash, so the obligations are debt-like.
• The $6.5 million retention pool approved in April 2026 is paid by the company at and after closing. The QoE calls it a seller transaction cost and leaves it out.
• The PHX II lien claim is $4.6 million, against a $1.2 million accrual. It went to mediation in April 2026 and is still in settlement discussions, and the PHX II budget excludes it.
• The swaps are terminated at closing. Three swaps fix SOFR at about 3.90% on $632.5 million to June 2027; their marks sit in other long-term liabilities, which the seller leaves out. A change of control is an event of default under the term loan and the construction facilities, so both are repaid; the term loan carries no prepayment premium.

Accrued property taxes, $11.2 million, are in neither the QoE’s working capital table nor its net debt, although its own definition puts them in working capital. The buy-side keeps them in the peg, as on the net working capital page, and does not count them again here.

The developments are a sources-and-uses item, not debt-like on a valuation of in-place EBITDA. At December 31, 2025, PHX II and ATL II had $552 million of approved budget still to spend against $180 million of undrawn construction facilities: a $372 million funding gap. The QoE quotes “approximately $480M at 12/31/25”, which is the March 2026 figure. A price that credits PHX II and ATL II as delivered should treat that funding as debt-like.

What moves the price

At an illustrative 22.0x, the findings with a value are worth about $453 million of equity: $376 million from EBITDA and $77.1 million from net debt. Power is the largest single item after the add-back tests as a group.

The multiple is an assumption: the process letter asks bidders for a single enterprise value and the data room gives no price guidance. Six findings carry no value yet: the rent at risk, receivables without invoices, a billing export conformed to the ledger, the development funding gap, the churn description and a CMH I tax abatement worth $3.1 million a year in the audited notes against $2.9 million in the QoE, ending in 2036.

Methodology. The example is fictional: Project Voltaic is the sale of Ironvale Digital Infrastructure, an illustrative data center operator, with a full data room of audited FY23-FY25 accounts, FY25 monthly management accounts, Q1 FY26 statements, tenant, billing, invoice and meter exports, the credit agreement and swap confirmations, construction budgets, HR and legal files, a CIM and a draft sell-side QoE. Figures come from that data room and from the workbook built in Compound, which cites every input to its file and page or cell. The add-back verdicts are those of the adjusted EBITDA workbook and the treatment of accrued property taxes follows the net working capital workbook. Power and the rent at risk are provisional estimates from the meter data and the rent roll, pending the documents on the request list. The 22.0x multiple is illustrative.

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