1. Latest News
  2. Submit Press Release
  1. PR Home
  2. Latest News
  3. Feeds
  4. Alerts
  5. Submit Free Press Release
  6. Journalist Account
  7. PRNewswire Distribution
International Acquisition Group Logo

The Case For Sell Side Due Diligence

M&A deals have always been challenging to close, and all the more so in recent years, when sale processes have become protracted, and due diligence efforts have intensified. By Jeff Bradford & Brian Lambrecht

 
PRLog - Mar. 28, 2012 - DALLAS -- Deals "? even good, mutually beneficial ones "? can be easily derailed by "surprises" from the seller. In this environment, sell-side due diligence is gaining broad acceptance. By doing their own internal homework and taking a critical intro-spective assessment in advance of providing buyers with due-diligence access, sell-ers can enhance deal value and improve negotiations. This is especially so given that buyer-identified issues can put a seller in a defensive negotiating position on price and transaction terms. Sell-side due diligence enables sellers and their advisers to proactively identify matters impacting value, negotiating leverage, and speed and certainty to close, thereby minimizing uncertainty in the sale process and maximizing transaction value.
What is sell-side due diligence?
Sell-side due diligence, sometimes referred to as reverse due diligence, requires a seller to take a critical, introspective look at their own financial position and assess the opportunities and risks facing their company prior to sale. The focal points of sell-side due diligence mirror the typical objectives deployed by a buyer performing buy-side due diligence. Typically, these objectives revolve around analyzing the quality of the company's historical earnings, the reasonableness of forecast assumptions, as-sessing working capital requirements, identifying tax risks, and understanding the company's customer, vendor and other key relationships. However, unlike buy-side due diligence, which is typically one of the final components of the M&A cycle, sell-side due diligence is commissioned early in the sale process.
Often, the transaction advisory practice of a public accounting firm is sought to assist management with the analysis and preparation of a sell-side report. These profes-sionals are versed in taking a buyer's view of an organization and will help the seller ask the tough questions in advance of the inevitable intense scrutiny of a buyer's diligence team. In many cases, it may be desirable to provide the resulting report to a select number of potential buyers to assist them in understanding the business.
How does a company benefit from sell-side due diligence?
Driving value and reducing the risk of the M&A process is the underlying motivation in performing sell-side due diligence. These objectives are achieved through the fol-lowing:

- Level playing field when soliciting bids. In situations when investment bankers are soliciting bids from a variety of interested parties, a sell-side due diligence report may be shared with interested third-parties. A quality of earnings report produced by an accounting firm can provide potential buyers with additional information regarding the seller's view on earnings before interest, taxes, depreciation and amortization (EBITDA) adjustments. All potential buyers will be able to confidently submit bids with a deeper knowledge about the significant matters impacting EBITDA. When all the cards are put on the table, the buyer has a reduced ability to renegotiate on price and terms at a later date, when other potentially interested buyers have typi-cally exited the process.
- Minimize surprises. All companies have their blemishes. Failing to manage the discussions on these important issues in the hopes that they'll be overlooked is a recipe for disaster. Sophisticated investment teams, along with their advisers, will leave nothing uncovered. Discovering surprises during due diligence can make a buyer skeptical of other unknowns, further impacting value and likelihood to close. Being upfront with issues enhances seller credibility and leads to a negotiation built on trust that prevails throughout the entire process.
- Be proactive by taking corrective measures. No one knows their company bet-ter than the owners. By first taking an introspective look, potential issues can be re-solved before they escalate. Additionally, sellers can report to buyers that the neces-sary steps are already under way to rectify the situation. Unaddressed issues accu-mulate in a buyer's mind and may distract from the positive accomplishments of the company or even escalate to a revaluation.
- Expedite the close. A comprehensive sell-side report will include all the requisite quality of earnings, income statement, balance sheet and working capital analyses common to a buy-side due diligence report. In addition, oftentimes sellers will want to include margin, customer, and vendor data that address profitability and concen-tration risks. The objective is to be thorough in order to streamline the buyer's own due diligence. The less uncertainty in a buyer's mind, the fewer the hurdles before close.
Who benefits from sell-side due diligence?
There are a number of beneficiaries of sell-side due diligence.
- Stand-alone businesses. Well-run businesses typically prepare a wealth of inter-nal information about their operations, customers and results of operations. Invest-ment bankers often pull the critical pieces of this information into their information memoranda and other marketing information.

However, there is often not a single document that will summarize relevant financial, tax and operational information in a manner to address matters most relevant during due diligence.
A thorough sell-side due diligence effort can pull all the information into a single comprehensive document providing a roadmap through the financial analysis. It also allows management to build a more complete data room to support the due diligence effort and help resolve follow up questions from potential buyers. The exercise of de-veloping such a document can also highlight areas where the seller's management team should prepare to respond to important questions that will be raised through the sale process.
- Companies seeking a divestiture. Management may identify an underperform-ing division or a non-core product line that they wish to divest which historically may not have complete, stand-alone financial information. Carve-out transactions tend to be highly complex. Understanding and clearly articulating the basis for the financial information provided to potential buyers is critical to minimize the likelihood, or basis for renegotiating on valuation later in the negotiation process. These situations often include analyzing cost structures, contribution margin, cost allocation and balance sheet carve out items.
- Investment bankers. Maintaining control of the sale process to maximize value and limit risk is the primary objective of investment banking firms. By going to mar-ket with potential issues already vetted, corrective measures already implemented and a solid understanding of sustainable EBITDA, the entire deal process is poised to be more streamlined and effective.
- Buyers. Buyers benefit from sell-side due diligence as a result of having a better understanding of the seller's financial information earlier in the process. This allows them to make more competitive bids with more assurance that there will be no sur-prises later in the process. Buyers are less likely to spend time on transactions that will not ultimately proceed to a closing, allowing them to focus their attention on only the most attractive opportunities.
In today's economic environment, buyer scrutiny has intensified and there are no se-crets after the diligence cycle is complete. As such, sell-side due diligence allows the seller to get in front of potential issues and to identify potential additional value driv-ers. Owners and their advisers can then make solid decisions about how to present these matters to prospective buyers. Increasingly, sellers are recognizing that having the ability to clearly articulate their financial information can be critical to demon-strating the value proposition to potential buyers. We expect an increasing number of sellers will turn to sell-side due diligence in an effort to drive value, efficiency and certainty in their transactions.

# # #

We help you prepare for the sale of your business and introduce you to serious buyers. We use a very effective strategy employed by Wall Street Mergers and Acquisition firms scaled to the needs of the small business.

--- End ---

Click to Share

Contact Email:
***@intlag.com Email Verified
Source:International Acquisition Group
Phone:877-497-0693
Zip:75006
Location:Dallas - Texas - United States
Industry:Business, Real Estate, Services
Tags:mergers, acquisitions, business for sale, buy a business, business transactions, sell, buyers, profit, exit strategy
Shortcut:prlog.org/11836053
Verified Account Email Address
Verified Account Phone Number

Disclaimer:   Issuers of the press releases are solely responsible for the content of their press releases. PRLog can't be held liable for the content posted by others.   Report Abuse

Latest Press Releases By “

More...

Trending News...



  1. SiteMap
  2. Privacy Policy
  3. Terms of Service
  4. Copyright Notice
  5. About
  6. Advertise
Like PRLog?
9K2K1K
Click to Share