Buyers of companies have always performed financial due diligence to confirm the information used to value their acquisitions and to help identify risks, weaknesses and opportunities. However, in recent years, sellers have been increasingly conducting their own financial due diligence prior to marketing the business for sale.
In an endeavor as complicated, important and risky as the sale of a business, pre-emptive, or “sell-side” due diligence helps sellers present their financial data more confidently, effectively and proactively throughout the marketing and sale process. It’s a tool that can help enhance the value of the company and help avoid the risk of lower valuations due to last minute surprises.
Below are five benefits of having a third-party team conduct sell-side financial due diligence before you start the sale process.
A due diligence report allows you and your team to identify positive EBITDA adjustments and growth opportunities that might enhance the value of the company. Conversely, the report can be used to proactively highlight items that potential buyers may view negatively. This gives your team advanced notice about any weaknesses, allowing you to address them and avoid unfavorable adjustments or unreasonable perceptions of risk.
The due diligence report is a tool that streamlines the sale process. The report addresses many of the most common, initial financial questions a buyer will ask. Providing potential buyers with a summary of due diligence findings early on helps ensure they won’t have to start from scratch in their own diligence process. And it’s always best to tell your company’s story from your perspective starting at the beginning of the process.
If it is prepared by a respected third party with deep M&A expertise and experience, the sell-side due diligence report provides potential buyers with an additional layer of comfort regarding your financial data. It allows buyers to proceed more confidently during the bidding process, knowing that a reputable outside group reviewed the information, while providing a sense of professionalism to the process. Eliminating the perception of deal risks translates to better valuations.
As a business owner you aren’t able to dedicate 100% of your time to a transaction — and you shouldn’t. You still need to run the business during the sale process, and if earnings slip, so will values. The due diligence team saves management time by supporting financial information gathering, answering buyers’ questions, and preparing exhibits and negotiations.
Sell-side due diligence advisers perform the bulk of their work before your business is marketed for sale. However, these teams stay connected to the transaction through the deal closing date. Your advisers will counsel you on key items that impact cash proceeds at closing, such as purchase agreement language and schedules, net working capital targets and adjustments, indebtedness items and other key deal considerations.
A sell-side diligence report gives you and a buyer peace of mind in what is often a very complex transaction. Your due diligence team’s expertise in deal-specific issues, along with their critical advice and solutions to issues throughout the course of the sale, ultimately provide your shareholders with greater deal value.
Contact Ken Randazzo at krandazzo@cohenco.com, Jim Lisy at jlisy@cohenco.com or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.