Preparing for Sell-Side Due Diligence

18 April, 2014

Sell-side due diligence is the process by which a seller takes a critical look at their own financial position and assesses the opportunities and risks that their company may face prior to a sale. This includes analyzing the quality of historical earnings of the company, assessing capital requirements and tax risks, and understanding the relationships between the company and customers, vendors and other connections.

Sell-side due diligence preparation is especially necessary if:

  • The strategy of a company involves selling all or a part of the business (typically a high-value asset such as a division, a product line, valuable intellectual property, or the entire business).
  • The company seeks to maximize the value returned to owners, shareholders and other stakeholders.
  • The company wants the process of buy-side due diligence – as prospective buyers evaluate their assets or entity – to go smoothly and minimize any downstream legal ramifications stemming from inadequate disclosure.

Your business can receive many benefits from sell-side due diligence preparation. When a technical accountant or financial advisor examines and helps you prepare your financial statements, you can discover any adjustments that may be needed in order to ensure that your accounting policies meet business standards, which will help improve the overall financial image of your company. Reviewing your financial documents can help you uncover any potential concerns that a buyer may have about your company before they discover these issues themselves during their due diligence process.

Through sell-side due diligence, you can also anticipate any concerns the purchaser may have. The buyer may come forth with difficult questions or concerns involving operations, customer relation, or goals/projections, and they will expect a plausible response from business owners. By dealing with these issues in the first place during the sell-side due diligence process, you can prepare yourself to respond quickly and convincingly. Providing credible and accurate data, and being open about any potential problems that you have found, will prove to the purchaser that you can be trusted as a business owner and that your goal is to manage the sale smoothly and efficiently.

Sell-side due diligence preparation will also ensure leverage in your negotiations during the sale of your business. Experts in due diligence will commonly put together a final report of due diligence that outlines their findings and analyzes any issues they have discovered. When you perform sell-side due diligence and prepare your documents in advance, more in-depth information can be shared with interested buyers. This will give confidence to potential buyers in submitting their bids, thus creating a competitive bidding environment between them and other buyers. By being prepared in advance, you can attain maximum value return in the sale of your company’s assets.