Conducting sell-side due diligence yields best results

Gain a better understanding of the company’s strengths and weaknesses

Apr 29, 2021
Private equity

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. 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. 

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. In fact, not conducting sell-side due diligence can prove to be a mistake. Sell-side due diligence facilitates a more efficient transaction and allows the seller to be equipped for conversations with buyers about the company’s financial and tax matters.

The benefits of being better prepared

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 sell-side due diligence 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.

Benefits of sell-side due diligence include:

  • 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

Sell-side due diligence as a value creator

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 buyers' 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. 

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.