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Looking for a Smooth Exit? Think Like a Buyer!

May 27, 2014

Conduct your own “sell-side” due diligence.

In today’s competitive marketplace, anyone looking to sell a company, whether it is a private equity and venture capital firm or the stockholders in a closely held business, can expect intense scrutiny by prospective buyers. Unfortunately, rigorous buy-side due diligence can quickly place you on the defensive, allowing the buyer to control the sale process. One of the best ways to stay in the driver’s seat is to conduct your own “sell-side” due diligence.

Sell-side due diligence means taking a critical look at your company — often with the help of outside advisors — from a buyer’s perspective. It may involve an evaluation of factors such as:

  • Earnings quality
  • Forecasts and projections
  • Accounting and financial reporting
  • Tax risks (at the local, state, federal and international levels)
  • Working capital needs
  • Human resources
  • Technology
  • Operations
  • Customer concentration

This self-assessment provides several important benefits. For example, it enables you to:

Avoid surprises. You can anticipate and address potential buyer concerns up front, establishing credibility and avoiding surprises that could easily derail a transaction if they were uncovered by the buyer.

Enhance value. It allows you to shape the presentation of financial and operational information, ensuring that prospective buyers understand and appreciate the various factors that drive the company’s value. Also, the process may reveal opportunities to maximize value by adjusting earnings (for example, by eliminating nonrecurring items) or correcting problems.

Strengthen financial reporting. Many buyers, especially those looking to finance the acquisition, will want multiple years of audited financials and place some level of reliance on those numbers. If your company typically hasn’t had an annual financial statement audit, it’s best to engage a reputable firm well in advance of a transaction to get the process started.

Streamline due diligence. By organizing due diligence information and supporting documentation in advance, you minimize costly delays and disruptions, shorten the buyer’s due diligence process, and make it easier to respond to information requests from multiple prospects.

Choose the right tax structure. Sell-side due diligence can help you analyze tax issues and determine the most efficient tax structure for the transaction.

Unfortunately, some seller’s see this as an unnecessary expense and chose to forego this process. However, from our experience, we have seen firsthand the benefits of going through the exercise well in advance of a transaction.

One recent engagement that comes to mind is related to a technology company that had some concerns about their sales tax liability in certain states in which they were doing business. They engaged us to evaluate their exposure, and we helped them reduce their potential liability under various “voluntary disclosure” programs offered by many of the states in which they were operating.

By going through this process, they were able to show their potential suitors the work that was performed to reduce any contingent liabilities related to these issues. It also provided the due diligence team from the buyers side with an extensive roadmap to what actions were taken by the company and helped reduce the time needed for this portion of the diligence.

If you're considering a sale, you should begin sell-side due diligence as early as possible — ideally at least six months or even years before a sale. The earlier you identify problems, the more time you’ll have to take corrective actions that will enhance the company’s value. Our advisors can help you with your due diligence needs. Please contact us to learn more about our experience and services.

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