M&A Due Diligence & Transactions

M&A Sell Side Transaction Support: Keys to Success

I was recently deployed into the sell side of an M&A transaction involving a high-growth company in the entertainment sector. This role, like other transaction support roles I have performed, involved a lot of granular-level data analysis and modeling. But the function of an M&A sell-side transaction support professional is always consistent:

  1. Collaborate with various stakeholders to validate historical financial information,
  2. Build robust forecasts that are trustworthy and well supported, and
  3. Anticipate buyer diligence requests before they are made.

In this blog, I will discuss the anticipatory nature of M&A transactional support that makes this work distinct from traditional corporate FP&A. I will also discuss the day-to-day tasks of an analyst facilitating the sale of a company to a prospective buyer and highlight key elements of success that are rarely considered until after the fact.

M&A Sell-Side Transaction Support: What is it?

As markets consolidate across industries, the need for M&A support increases. Every M&A transaction is unique. The key players, company dynamics, growth trajectories, profit margins, industry trends, etc., will vary from deal to deal. However, consistencies in pre-acquisition analysis exist across deals. Professionals working on deals that involve company sales or mergers will need to:

  • Compile data room information.
  • Build and roll forward quality of earnings models.
  • Provide ad hoc analytical support including reliable forecasts.
  • Serve as a liaison between the company and the investment bankers hired by the company.

With so many moving parts, what is the secret to success?

In my experience, the sell-side analyst must:

  1. Be nimble enough to shift priorities on a moment’s notice to keep the diligence process on track.
  2. Reframe diligence requests to better suit the buyer’s needs and the data available.

What are buy-side diligence requests?

Buy-side diligence requests for information (e.g., accounting, finance, legal or tax) assist acquirers in understanding the business and determining the soundness of the target company’s financial position and risks that might jeopardize the investment. These requests come in phases:

  • At first, preliminary or “initial” requests are essentially populated from a template.
  • Later in the evaluation process, these requests will become more specific to the individual target company as the buyer gains insight.

The M&A sell side transaction support analyst will also participate in presentations to management and may be asked to lead meetings with potential buyers and other outside consultants who performed preliminary financial or valuation analysis.

The Day-to-Day: What to Expect While Working the Deal

On top of the standard requests a sell-side support analyst can expect to receive, company-specific, ad-hoc requests will also come through as supplemental information geared to give the potential buyer greater understanding of the opportunities and risks. This in turn will give them greater comfort that the investment is worthwhile relative to alternatives.

When the sell-side support analyst joins the deal team, it’s likely the initial request list will not yet have been received from the buyer. Joining the team early is a good thing, as it allows the analyst time to begin assembling useful information in the data room such as historical financial statements, expense reports and trial balances.

It’s a good idea to start with a preexisting checklist used in prior deals. An experienced M&A analyst will have such a checklist at their disposal. The request list received from the buyer will differ from the checklist, but this initial list is a great starting point in anticipation of the actual requests.

The objective of the analyst facilitating deal close should always be to stay one step ahead of the buyer. It’s never good to be caught flat footed as this could delay the process, which is not in either party’s interest. The sell-side analyst may be representing the seller, but from a broader perspective, they are ultimately serving the transaction and shepherding it to closing.

Related Insights:

The Transaction Deal Team: Who is Driving the Process?

Sell-side analysts may find themselves interacting much or little with the buy-side counterparty. They should expect to be working closely with company management as well as the investment banking team. The investment bankers hired by the target company may be visibly driving the transaction forward, or the company management team may be in the driver’s seat, depending on the transaction dynamics. Either way, the sell-side M&A support analyst should be comfortable working at the behest of all parties.  

With multiple people working on the deal team, communication can present a challenge. Clear assignment of tasks with reasonable deliverable timetables are essential to keep the process on track and to prevent missed work or duplicative work. The support analyst may focus on financial and accounting requests, while someone else on the deal team may focus on legal, tax or HR-related requests. Company management will need to remain focused on regular day-to-day operations. In my experience, that means they will look to the support analyst to take the initiative on diligence requests.

Reframing the Question: The Best Piece of Advice

Often the buyer isn’t privy to what data are available, so they formulate a request based on what they think they need. But the sell-side analyst, knowing what data exist and in what format, should communicate with the buyer to reframe requests that aren’t readily addressable. In so doing, it may be possible to satisfy the request in a slightly different way than originally posited by leveraging data that already exists.

When a request comes in, before jumping headfirst into the analysis, the analyst should first take a step back, look at how this request fits within the broader scope of the transaction and ask themselves:

“What is the buyer really looking for here?”

The answer to that question should drive the work that follows. This will reduce turnaround time, keep the closing date target in play and boost buyer confidence in the information provided. This work has the added benefit of setting up the buyer with the best chance for a smooth and orderly post-merger integration.

Restating the Past Before Looking to the Future

Before a transaction closes or even before buyer letters of interest are issued, the M&A sell side transaction support professional commonly must restate historical financial information and make certain adjustments, such as timing of revenue and management add-backs to reported EBITDA. Adjustments to EBITDA should be made for one-time retainers, purchases or investments, non-recurring legal fees, personal expenses, tax credits, startup costs and charitable contributions. These management adjustments will be reflected in what is provided to the buyers, including the income statements and quality of earnings report. A bridge from reported EBITDA to adjusted EBITDA should also be prepared and added to the data room.

In the event the target company’s accounting policies do not conform to appropriate accounting standards or do not meet the acquirer’s expectations for how the information is reported, a retroactive restatement of financials may be necessary. This may involve a wholesale restatement of the P&L, or it may be more targeted to a specific line item, such as net revenue. For example, the sell-side support analyst may be asked to construct a pro forma revenue model that adjusts monthly revenue received to align with the timing of labor hours billed. If such information is not readily available in the existing reporting system, a detailed analysis of employee timesheets may be the best approach. This just serves as another example of why getting a head start on the diligence requests is crucial, as well as reframing the requests to the requestor to ensure the optimal use of your time in support of the overall process.

Let’s Get Back to the Future

Great, so historical financial information has been added to the data room, and any restatements needed have been made and reconciled.

But what about the future?

This is where your forecast comes into play, and it will be heavily scrutinized. The forecast model should be very clear in what it is assuming. Break out the assumptions and drivers on a separate sheet in your model or include them in the key presentations to buyers, so there is no confusion as to the basis of the projections. Clarity of assumptions will also allow prospective buyers to better formulate their sensitivity analysis requests, which are likely to come later in the diligence process. It does neither the buyer nor seller much good for the support analyst to spend valuable time running sensitivities on variables that either aren’t relevant or lack explanatory forecasting power.

Early-on analysis that you add to the data room, such as the current-year forecast, budget, key performance indicators and so on, will serve future requests that come your way. Think of the diligence requests as different pieces to the same puzzle, as opposed to one-offs that have no relation to the others. The quality of the work performed on initial requests will either help or hurt what is to come on the road to the buyer’s go/no-go decision. Support for the key assumptions in forward-looking financials will also help to alleviate buyer concern that seller forecasts are overly aggressive (and in turn, the transaction price is inflated), especially if the forward-looking financials differ materially from historical performance.

Learn More About M&A Sell Side Transaction Support

If you like to explore how our team of professionals can offer support in your transaction, then visit our M&A Consulting and Due Diligence Support page to learn more about how we work with Clients. You can also contact us directly to start a conversation.

If you’d like to learn more about the thought process of fielding due diligence requests, you can also download our decision tree by clicking on the image below and submitting the form:

sell-side due diligence decision tree

About the Author

Chris has 15+ years of diverse finance experience across a variety of industries including entertainment, gaming, healthcare, distribution, retail, financial services and information technology. He has held various positions in middle-market, high-growth startups and Fortune 500 companies. Prior to 8020, Chris held manager and senior manager finance positions at The Walt Disney Company, Focus Features (a division of NBCUniversal), Blue Cross Blue Shield Association and SpartanNash Company. He consulted for Universal Pictures Home Entertainment and Zacks Investment Research after beginning his career as Equity Research Analyst for Piper Jaffray. Chris has a broad range of experience in financial reporting, budgeting, financial modeling, M&A transactions, contract negotiations, strategic planning, business development and post-acquisition integration. He holds a M.S. in Applied Economics and Management from Cornell University and a B.S. in Applied Economics from the University of Minnesota.

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