How to SELL your Business Tips and inside secrets.
1. Sell-side due diligence is broadly accepted in middle-market deals.
Vendor due diligence has been common in Europe for a long time, and over the past several years, sell-side due diligence has gained acceptance in the United States as well. All buyers perform buy-side diligence in some form or fashion, and it’s critical for sellers to do the same in order to level the playing field. Educating sellers and business owners on the value of sell-side due diligence has been the largest obstacle to its acceptance. Many business owners are navigating the sale process for the first time, so they may not be fully aware of the benefits of the sell-side due diligence process.
Untimely discussions about concerns uncovered by buyers late in the deal process can lead to the most costly of broken deals. By that point, virtually all third-party costs have been incurred by both the buyer and seller; effectively these costs cannot be recovered. Companies that cannot defend their numbers get re-traded, destroying value for the seller. Sellers should understand the importance of proactively addressing buyers’ potential concerns and the benefits of sell-side due diligence to mitigate this risk.
3. Sellers can no longer go to market with less-than-optimal financial transparency and expect to attract a willing and able buyer.
Sell-side due diligence is intended to identify any and all financial, accounting, tax or IT issues that buyers would identify in advance of them identifying it. In other words, sell-side due diligence eliminates the risk of surprises surfacing during buyer due diligence. This is critical because the issues are identified early in the process, giving the seller an opportunity to correct any problems. Sellers need to understand that identifying, acknowledging and sharing any potential problems will earn a buyer’s trust and demonstrate credibility. Once a buyer identifies an issue that has not already been disclosed or discovered by the seller, the surety of the deal closing is reduced, and the impact could be anything from a purchase-price reduction to full destruction of the deal, which can be extremely costly.
4. Sell-side due diligence supports the investment banking process.
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| Vince Murphy Business Broker Owner Panther Equity Advisors |
A sell-side due diligence report is intended to reflect numbers that are “bullet-proof” and will hold up against the highest level of scrutiny from a buyer. As sell-side due diligence generally occurs in advance of the investment banker’s sales process, a banker can have the utmost confidence in the historical numbers as well as confidence that potential concerns have already been vetted. The understanding that there will be no surprises in the numbers during the process allows the seller’s investment banking team to focus more time on other aspects of the sale, which ultimately leads to a more efficient deal process.
5. Having audited financials is only one ingredient in a successful deal process.
GAAP-compliant financials are a great first step toward an adjusted EBITDA number. Sell-side due diligence supplements audited financials by identifying three major categories of adjustments: GAAP or accrual-based adjustments, normalizing adjustments and pro forma adjustments. While audited financials generally address the first category (GAAP), they do not address the other two. Sellers moving toward an exit generally incur a number of one-time expenses in preparation for a sale that are not part of recurring EBITDA. These items should be added back in order to arrive at a normalized EBITDA. In addition, sellers that have “rolled up” or acquired many businesses over a short period of time will have financials that may reflect an over-burdened income statement as they continue to cut costs related to synergies from prior acquisitions. Sell-side due diligence works with the seller to present the real view of ongoing, recurring EBITDA.
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