Contemplating a company sale? Some reasons to consider sell-side due diligence
After many years of hard work and dedication, you’ve made the decision to potentially sell your business. The sale process itself is typically a somewhat arduous task, with one of the most challenging parts being under the due diligence microscope after signing a letter of intent.
The term ‘due diligence’ is primarily understood to be the process that a prospective buyer undertakes to learn as much as possible about a target before closing on the purchase (buy-side due diligence). Obviously, a buyer wants to be fully confident that the normalized earnings of a target are sustainable on a prospective basis and supported by accounting records, facts, circumstances and documentation. Also, a buyer needs to ensure that a target is not saddled with any significant down-side risk (e.g., warranty claims, environmental issues, regulatory noncompliance, tax obligations, etc.).
Sell-side due diligence, on the other hand, is the process that a prospective seller undertakes to self-scout the company and proactively identify potential deal issues. In assisting clients with buy-side due diligence, Schneider Downs has found that small- to middle-market targets that have performed rigorous sell-side due diligence have fared much better than their counterparts that have not. Targets that have performed sell-side due diligence have already taken a hard, close look at themselves before being subject to buy-side due diligence by prospective buyers, and have identified the most vital transaction information of interest to a potential buyer. Also, as a result of the sell-side due diligence effort, many of the underlying data, documents and records have been uploaded to a data room for timely release to the prospective buyer and its representatives.
Key benefits that can be derived from a sell-side due diligence evaluation include:
Accurate Valuation of the Company
A seller needs to project an accurate picture of the company’s financial results, including pro forma adjustments supported by data and/or documents that can be verified by the buyer. When buyers perform due diligence, their goal is to try to identify negative earnings adjustments, which would result in a lower valuation. By undertaking sell-side due diligence, a seller could find positive adjustments that could increase the valuation.
Address Buyer Concerns
Buyers get skittish when the reliability of financial information and/or data provided by the seller is obviously erroneous or in question. Sell-side due diligence allows for a ‘dry run’ at verifying the data and financial information by a ‘friendly’ party prior to issuance to a potential buyer so that errors can be fixed or explanations provided up front.
Sell-side due diligence will not necessarily identify every single potential problem or question involved in a deal, but it should address the most significant issues so that a ‘deal killer’ does not come from out of nowhere. It’s better to identify these concerns through sell-side due diligence and control the message to the buyer than to be surprised when a buyer finds something 45 days into the exclusivity period.
If you’re considering selling your company, we highly recommend performing sell-side due diligence prior to marketing your company in order to maximize value, minimize pain and ultimately get to the finish line. Schneider Downs has extensive experience in providing buy-side and sell-side due diligence services. Contact Joel M. Rosenthal or Marc P. Brdar for more information.
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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.