Benefits of sell-side due diligence

As an owner looking to sell their business in today’s environment, maximizing value and controlling the narrative is as important as ever. Gone are the days of high-level, buy-side diligence where the transaction still trades at a high multiple, as the tailwinds of all-time low interest rates no longer exist to backstop transactions.

In today’s high-interest rate environment, owners looking to sell their business should engage sell-side diligence to ensure a smooth and efficient sale process. This is done by limiting surprises, providing quality and trust in the underlying numbers, and allowing management to focus on running the business.

The two unofficial rules of an efficient and value-maximizing sell-side process are (1) being upfront about the business (including getting the bad news out of the way early, but controlling the narrative) and (2) meeting your short-term forecasts during the sale process, which provides confidence in the business’ ability to meet long-term projections, on which valuations are often contingent.

(1) Controlling the narrative

While somewhat counterintuitive, it is critical and ethical for sellers to be honest and forthcoming about any challenges in the business. In addition to controlling the narrative, a benefit of being open and upfront about the issues facing the business is that it minimizes the risk of surprises late in the game where a buyer may re-trade on pricing, or risk the deal falls apart altogether.

By being upfront, the seller is in the position to control the narrative on mitigating actions, which allows the management team the ability to respond accordingly. For example, if the concern is softer sales in a particular customer or product line, the management team may cite a separate recently won customer in the backlog or pipeline that hasn’t ramped up yet. Another example: If a manufacturing business has a deferred warranty on certain of its products, management may cite the opportunity to get back in front of those customers with the latest product and/or service offering to retain those customers and improve standing with them going forward.

(2) Achieving forecast numbers

Sellers are often not prepared for either the level of rigor buyer diligence entails, or the time commitment required. Sell-side diligence helps with both of these factors, as it allows management to primarily focus on running the business (and ensuring the company meets or exceeds its projections), as opposed to dealing with the rigorous and time-consuming buyer due diligence process.

This is especially important as it is common during sell-side processes to provide buyers with roll-forward financials for another month or quarter. Buyers will then inevitably compare these financials to what was forecasted for that period. Any miss relative to target or expectations may not only impact the current period results, but also, rightly or wrongly, imply future projections may be at risk which opens the door for re-negotiating on price. This can be alleviated by ensuring historical financials reviewed by sell-side diligence teams are seamlessly linked up with the basis of the forecast and allowing management to focus on running the business to ensure projections are met.

Summary

Sell-side due diligence is highly recommended for sellers looking to maximize value and ensure a smooth transaction process. By proactively addressing potential challenges and maintaining transparency, sellers can control the narrative and minimize last-minute surprises that could jeopardize a deal. Additionally, ensuring that financial forecasts are met instills confidence in buyers and helps preserve valuation expectations.