Due Diligence – Not Just for Buyers Anymore
Whether it’s the sale of a standalone entity or the strategic divestiture of a business unit or product line, selling a business is a complex transaction filled with uncertainty. While acquirers traditionally engage a fleet of professional service providers to perform due diligence, identify risks and strengthen negotiating positions, sophisticated sellers are increasingly turning the tables on buyers and engaging advisors to perform sell-side due diligence prior to offering the business for sale.
What Is Sell-Side Due Diligence?
Sell-side due diligence can take many forms, but it’s essentially a process mirroring that typically performed by potential acquirers. It can range from limited data room preparation and management support to full-scope due diligence resulting in an independent sell-side diligence report that can be shared with potential acquirers and leveraged by their advisors. Regardless of the format, sell-side diligence involves the seller taking an objective look at the quality and sustainability of the company’s earnings, the reasonableness of its forecasts, its historical working capital requirements and exposures by standing in the shoes of potential suitors. While nobody knows the business better than the owner, the transaction process may identify risk areas not previously contemplated that could compromise value or the certainty of closure. Sellers increasingly look outside in performing this critical assessment of business areas that drive value.
What Are the Benefits?
Sell-side diligence procedures help a seller understand financial exposures and opportunities and proactively address these issues before going to market. Every company has its strengths, weaknesses, risks and opportunities. When a seller identifies and confronts the issues ahead of time, it can better manage the discussion around these topics, proactively present them to buyers and focus negotiations on the entity’s strengths.
In addition to identifying potential risks, sell-side diligence also can identify opportunities that might not otherwise be uncovered. While a buy-side diligence team will almost certainly bring identified risks to the seller’s attention, it likely will be less transparent with any upside discovered during its diligence. By identifying these opportunities, such as nonrecurring expenses or favorable run-rate adjustments that can be presented in a quality of earnings analysis, the seller is better positioned to receive full value for these items in the ultimate purchase price.
The sell-side due diligence process also can help assemble complete and accurate financial information. Transparent financial information that reconciles to the underlying financial records lends credibility to management, reduces surprise during buy-side diligence and offers the seller a dress rehearsal prior to interactions with the buyer’s advisors. This effort can expedite the sales process by streamlining the buyer’s due diligence, thereby protecting shareholder value.
While sell-side due diligence is a valuable tool to help sellers realize potential value of their asset, it’s just one facet of a transaction readiness strategy. By identifying and getting ahead of the issues early in the process, sellers can proactively manage the discussions and drive efficiency, certainty and value throughout the transaction.
For more information, contact your BKD advisor.