Conducting sell-side due diligence yields best results
In today’s fast-paced and highly competitive mergers and acquisitions (M&A) environment deal-makers want to close their deals quickly and smoothly at the desired valuation. While 2015 was a record year for M&A—globally, M&A activity reached a volume of $4.9 trillion, beating the record of $4.6 trillion set in 2007—2016 is shaping up to be more competitive. M&A volume in the first quarter of 2016 saw a 25 percent year-over-year drop in M&A volume, according to Dealogic. This means buyers are being more selective when acquiring companies.
Conducting sell-side due diligence can help sellers prepare their companies for a sale process in today’s tightening market environment. Private equity firms are increasingly seeing the benefit of the practice. Over the last few years, private equity firms have started to frequently require their portfolio companies to conduct a sell-side due diligence process. Family-owned businesses have also been increasingly performing sell-side due diligence, but still not as frequently as private equity-owned portfolio companies. This doesn’t come as a surprise, as most family business owners are selling a company once or twice in their lifetime and aren’t experts on buying and selling companies; however, not conducting sell-side due diligence can prove to be a mistake.
Due diligence used to be relegated to the buyers, but sellers are seeing the benefits of being better prepared, as they enter the sales process. The primary benefit of conducting sell-side due diligence is it facilitates a more efficient transaction and allows the seller to be equipped for conversations with buyers about the company’s financial and tax matters.
By conducting sell-side due diligence, sellers gain a better understanding of the company’s strengths and weaknesses and are able to present financial information to buyers with confidence. Conversely, without conducting sell-side due diligence, sellers often aren’t prepared for the rigors of buyer due diligence. Sellers do not naturally anticipate buyer concerns, and they aren’t prepared to answer the hard questions buyers will undoubtedly ask during the process. The information gleaned from the process gives the seller the ability to create a dialogue with the potential buyers on key points that should be highlighted and approach any conversations about potential weaknesses the company may have head-on. For example, a buyer may see something in the financials that indicates soft sales, but a seller who is prepared may want to use the data points to facilitate a conversation about backlog and growth opportunities.
After conducting sell-side due diligence, sellers should have comfort that buyers will not uncover any surprises in the financial information that could give a buyer leverage. Through the sell-side due diligence, buyers will receive an objective view of the company’s financial information, so the best offer can be made without a risk of re-trade.
The benefits of sell-side due diligence are:
- Improves the speed to closing
- Allows the seller to understand and proactively address the potential concerns a buyer may have
- Allows management to spend more time focused on the business during the sale process
- Reduces the risk of the deal being renegotiated due to a buyer’s financial diligence findings
In addition to making the seller ready to embark on a sales process, having sell-side due diligence completed can significantly reduce the burden on the seller to respond to multiple buyer’s document requests and redundant queries, because the work will have already been done. Sell-side due diligence allows management to continue focusing on running the business until the sale is complete without getting bogged down by potential buyers. It also helps give management an idea of what buyers will be interested in knowing and may ask.
Sellers can also benefit from pre-sale analysis of tax matters. Tax professionals can offer invaluable advice on how to structure the sale and how to obtain the best tax treatment on the transaction.
The bottom line is that selling a company is a once-in-a-lifetime event for most business owners, and they need to be prepared in order to compete effectively in today’s environment. Conducting sell side due diligence can help.
Sellers that take the time to conduct sell-side due diligence can optimize the outcome of their deal.
Learn how sell-side due diligence can help maximize value and minimize negotiations.