Most businesses are familiar with buy-side due diligence, but the sell-side process is not as well known. This is a proactive way for sellers and advisors to present the business in the best possible light. This in turn can maximize the potential for a favorable price and uncover red flags before buyers see them. Though the process can feel overwhelming, it can protect a transaction from going south.
Here are six problematic factors that sell-side due diligence can reveal.
Weak Operational Data or Financial Systems
The seller might use multiple data systems, an antiquated system, or worst of all, no system at all. Accessing detailed financials is going to be a buy-side due diligence team’s first priority. When sharing information with buyers, the information must be organized, and compiled in a manner that makes analysis easy. Sell-side due diligence allows the vetting of this information before the buy-side process begins.
Overtaxed Employee Resources
In smaller businesses, accounting may fill many roles. There may not be enough time or energy to respond to buyer due diligence requests without letting something else slide. During the sell-side process, the service provider is an arm of the seller’s organization, and can offer detailed analysis of financial trends, as well as supporting schedules. This allows the presentation of this information in the best possible light.
Chaotic Financial Narrative
Many sellers have a deep understanding of their businesses’ intricacies, but cannot succinctly articulate the financial information buyers seek. All buyers seek to prove their investment theories during due diligence. Sellers must be able to speak to this.
The right sell-side process can dig into financial details to prepare sellers for financial conversations.
No Consolidation and Multiple Entities
As a business evolves, the seller might start additional entities that are now contemplated as a part of the sale process. These entities might never have been consolidated, and intercompany transactions may be present in financial statements. The sell-side process can determine how each entity impacts potential earnings, offering buyers a comprehensive view of what they are acquiring.
Anticipated Reductions in Purchase Price
Numerous findings could reduce the purchase price. Those might include non-recurring or out-of-period adjustments, inaccurately managed or adjusted EBITDA, and accounting departures. Sell-side due diligence allows sellers to remain on top of potential areas of risk, reducing the likelihood of price reductions after the letter of intent (LOI) is signed and negotiation power shifts to the buyer.
Ineffective Tax Structuring
Most transactions are structured either as asset or stock sales. Determining which structure is right can profoundly affect net cash. The value of a sell-side process is that the seller can minimize the impact of taxes on proceeds by structuring the deal to their best advantage.
There’s no easy way to predict whether a deal will actually close. However, sell-side due diligence significantly shortens the process of buyer due diligence, and lowers the chances of a fractured deal. Hiring an advisor can assist sellers with due diligence, and adequate planning can make the M&A process as successful as possible.