M&A Due Diligence & Transaction Support

Driving Value and Saving Time: How Sell-Side Due Diligence Really Works

Due diligence: it’s a no-brainer for experienced investors, and buy-side best practices are straightforward and well-established. Companies don’t often sell themselves, though, and few executives have the experience and know-how necessary to get the maximum value for the businesses they’ve built. From accounting to operations to HR, a successful sale requires input from all major stakeholders within an enterprise, and that input has to be presented in the best possible ways to potential buyers.

Sell-side due diligence also takes time, and lots of it. Selling a company is a full-time job, and it’s always a juggling act for senior management to run their companies while preparing for a sale. Operations suffer if they shift their focus to transactional tasks, slowing growth and driving down the valuation. Time kills all deals, though, and too much attention to day-to-day work makes it impossible to quickly respond to investor inquiries.

Ultimately, successful sell-side due diligence comes down to consulting the right people on the right matters at the right times – and sooner is always better than later. Poor planning leads to low valuations and lost deals, but a dedicated, coordinated team can ensure your sale goes off without a hitch. Here’s how it’s done.

Preserving Your Valuation

Simply put, your top priority during due diligence is to justify and maintain your asking price. Buyers will sift through your operations with a fine-toothed comb, burying you with inquiries, and you’ll need to be ready to provide the documents that back up your claims. These include titles for hard assets, natural resources and intellectual property, as well as years of financial records, tax statements and legal documentation. To demonstrate your sustainability and projected growth, you’ll also need current contracts, cash flow records and customer agreements.

Depending on your potential buyers and the nature of your sale, confidentiality may also be key. What will your employees do if they catch wind of an upcoming sale? How about your customers and vendors – will they jump ship if they know you’re about to merge? Maintaining morale and preserving relationships are critical during this months-long process, and you may need to keep certain parties out of the loop.

Sidestepping Landmines

Compiling and presenting all of those supporting documents is time-consuming enough, and executives often overlook significant liabilities in the process. Buyers certainly won’t forget to ask, though, and it’s imperative to uncover any issues before they do.

Some of the most commonly overlooked items are expired licenses, environmental erosions and overdue maintenance and repairs. Operations may be running smoothly now, but without the right permissions, working conditions and equipment, your profit projections won’t hold up.

Other oversights include incomplete records and forgotten contracts. Articles of incorporation, meeting minutes, years-old tax forms and other seemingly insignificant documents will be important to your buyers, and they’ll use any justification they can to challenge your valuation. Likewise, outdated but legally binding agreements (think counter-party consent) may prevent you from selling your business at all. Losing track of these records is particularly common among companies that lack robust, in-house legal and accounting departments.

Fortunately, by uncovering these landmines before your buyers do, you may actually be able to increase your company’s valuation. Imagine, for example, that a phase I environmental study uncovers an abandoned underground storage tank in your parking lot. You can hire a contractor to remove it before the sale, providing investors with the guarantee they won’t inherit the environmental liability.

Driving Valuation with Operational Improvements

Better yet, you can justify a higher valuation by streamlining operations during the due diligence process. In almost every enterprise, there are widely accepted “truths” that are actually contradicted by overlooked data. A sales team might wrongfully believe that a given product is the most profitable in its class, for instance, or that a certain customer accounts for the majority of a region’s sales.

Management will undermine their credibility if they relay these “facts” to potential buyers. But if they catch their mistakes in the process, they can appropriately cut costs, manipulate prices and shift the sale team’s focus to higher-value products and customers.

Saving Time with Dedicated Support

Providing documents, investigating liabilities and implementing operational improvements all take time – time you don’t have when you’re trying to keep day-to-day operations afloat. Few entrepreneurs want to allocate resources to outside support, but the due diligence process is often too involved to assign solely to existing personnel.

With a dedicated resource, you can quickly turn around due diligence requests while spending the bulk of your own time on operations. Expert M&A and Due Diligence support will also spot liabilities and point out key areas for improvement, and they’ll ensure potential buyers have the means to complete the deal. Ultimately, offloading the process to a third party will help keep your company’s numbers trending upward, driving a higher valuation or reducing risk that will more than offset your due diligence costs.

To learn how the 8020 Consulting team can guide your company through the due diligence process, please call us at (855) 367-8020. You can also learn more about decision-making in the sell-side due diligence process by downloading our flow chart:

sell-side due diligence decision tree

Robert Dika has over 16 years of professional experience in the food, real estate, manufacturing and entertainment industries. He has held several positions in corporate development, finance and auditing with Dole Foods, Castle & Cook, Warner Bros., and KPMG. His diverse set of projects includes mergers and acquisitions, initial public offerings, privatizations, real estate development and special projects. At 8020 Consulting, he has worked as an acting CFO for a foods industry client and performed due diligence support for a major acquisition.

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