Greasing the Skids: Sell-Side Due Diligence

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.

Eliminate Surprises

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.