There has been an uptick in the number of companies doing sell side due diligence over the past few years, for many good reasons. Sell side diligence helps the company determine its true value by identifying its sustainable cash flows, the quality of earnings that will be most important to potential buyers. It also provides comfort to intermediaries, provides confidence in the numbers, and provides a forum to explain the company’s history. In addition, it speeds the process of a potential transaction. In today’s world, there is value to cutting time between the letter of intent and closing.
The most common areas that Sell Side Due Diligenceshould cover:
Determination and documentation of owner expense addbacks
Identification of one-time financial events
Evaluation of capital investments on future earnings
Potential off-balance-sheet liabilities
Impact of employee benefits
Evaluation of staffing levels
Customer trends, contracts and sustainability
Impact of recent marketing and sales programs on future revenues
Vendor relationships, contracts and commitments
IT investments and risks
Federal, state and local taxes including sales and use taxes
The above are only a few items to consider. Careful planning of the engagement should include meetings with the company’s management to determine other company-specific areas that would need to be addressed as part of the diligence plan.
One other benefit of sell side diligence is that it gives the company the opportunity to develop a full and complete data bank to support the quality of earnings and other findings. This will help reduce the burden of producing a huge amount of data in a condensed period of time when the company gets the right offer.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.