The Importance Of Sell-Side Due Diligence

October 2012       Download PDF      Print

Selling your company may be the most significant event in your career as a business owner. The stakes are extremely high because a successful deal is likely to yield great financial rewards. At the same time, the sale process can be very complex and mentally draining. Even the most successful and experienced business owners may find themselves unprepared for the challenges that arise during the sale process.

The current economic climate further complicates the sale process. Potential buyers are now scrutinizing companies more closely than ever. Issues that were once considered minor now may delay or even kill a potential deal. By enlisting a professional to help conduct thorough due diligence on your own company early in the sale process, you will reduce the likelihood of critical issues arising later. This will in turn help ensure you receive maximum value for your company.

Sell-side due diligence can help you realize full value from the sale of your company in a number of ways:

Reviewing and preparing financials

An advisor with technical accounting and finance knowledge can examine and assist in the preparation and adjustment of your financial statements to ensure that your accounting policies meet normal business standards and to improve the overall financial image of your company. By reviewing financial statements for potential issues relating to revenue recognition, inventory costing, unrecorded accruals, and quality of earnings, you can uncover potential concerns buyers may have about your company before they discover them during their own due diligence efforts.

Anticipating buyer concerns

During the due diligence process, buyers may confront you with difficult questions concerning things such as operations, customer concentrations, or projections and expect valid, plausible responses. You will undoubtedly be able to anticipate some of these issues; however, ignoring them and hoping the buyer will overlook them during their own due diligence efforts is likely to back-fire. When the buyer raises these issues, you may not be prepared to address their concerns since you avoided dealing with the issues in the first place.

Withholding information or neglecting to tackle issues head-on can raise a buyer's concerns and will likely result in a negative purchase price adjustment or no deal at all. On the other hand, by providing credible and accurate data and being forthcoming about potential problems, you will show buyers that you are trustworthy and are trying to manage a transparent process. Working with a qualified professional to complete due diligence on your own company will help ensure that you are aware of, and prepared for, any questions that may arise.

Ensuring leverage in negotiations

Due diligence experts typically put together a final due diligence report outlining their findings and analyzing the issues they've identified. By preparing due diligence documents early, you can share more in-depth information with interested parties before soliciting bids from multiple buyers. Potential buyers will likely feel more confident submitting bids, which will help create a competitive bidding environment between parties. Ultimately this will help ensure you receive maximum value for your company.

By sharing such information, you are not only helping them feel more comfortable with a potential investment, but you are also saving them some of the cost and effort they would spend during their own due diligence process.

While there are time and costs associated with performing sell-side due diligence, a business owner who hopes to receive maximum value for his company should be prepared to take any steps necessary to help ensure a transparent and smooth sale process. Reverse due diligence will help you prepare your company for intense buyer scrutiny and avoid stressful roadblocks throughout the sale process. Without proper preparation, you run the risk of receiving less than maximum value for your company or experiencing issues that prevent deals from closing.

Potential buyers will carefully review many elements of a company during the due diligence process. The list below highlights some of the areas that are most frequently subjected to intense buyer scrutiny. Business owners should strongly consider engaging a due diligence professional to review these areas and help identify potential buyer concerns that could derail or delay a successful deal.

  • Human resources
  • Operations
  • Information technology
  • Tax
  • Legal
  • Financial
  • Insurance
  • SWOT