Private equity firms increasingly are using sell-side due diligence as part of their exit strategies to streamline transactions and achieve maximum valuations. Identifying issues before going to market gives management time to remediate — before a deal’s on the table.
Why sell-side due diligence is a win-win
If you’re worried sell-side due diligence might turn up something you’d rather not have surface, let’s be clear: When a seller engages a firm to conduct due diligence, any issues uncovered are the same issues a buyer is going to find. Identifying potential areas of risk prior to going to market can prepare the management team and, in many cases, give you time to remediate — before there’s a deal on the table.
Sell-side diligence helps both the seller and buyer understand how multiple factors positively or negatively affect EBITDA, which clarifies the company’s true value drivers.
For the seller, sell-side due diligence provides an accurate idea of the business’s true valuation. That credible valuation helps establish trust with the buyer and prospective lenders. Sell-side diligence also accelerates the buyer’s diligence process since the seller already has an independent, third-party presentation of the company’s financial performance and tax situation at the ready. The benefits add up to fewer delays and headaches and, often, an expedited close.
What’s involved in sell-side due diligence?
Sell-side due diligence can uncover details that directly impact business valuation in two areas: quality of earnings and tax.
Sell-side diligence can be useful when businesses commonly make non-GAAP adjustments to reflect the go-forward run rate. An increase or decrease in product or service pricing, for example, may impact the quality of earnings but be immaterial in an audit. When you’re looking at a sale, however, the materiality threshold is significantly lower since businesses typically are valued based on a multiple of EBITDA.
Understanding the full picture puts sellers in a better position to maximize the value they’re going to get for the company. This holistic view is especially important when selling carve-outs or divisions of larger companies that may not have separately reported financial statements.
Start the process early
If you’re considering conducting sell-side due diligence, begin early — long before going to market. Think in terms of years, rather than months or weeks. Conducting sell-side due diligence early gives you valuable opportunities — not only to resolve issues that might give a prospective buyer pause but also to learn the best ways to maximize the value of your investment.
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