Preface: Sell-side due diligence prepares your business for the potential bidders before your business reaches the marketplace. Exit planning can never begin to early. History supports the data that every business owner will eventually exit or transfer ownership. Plan ahead. Be prepared. Performing sell-side due diligence with your accountants and/or third part advisors will reduce risks and build buyers confidence; ultimately adding substantial value. Within reach, the best investment bank tombstones are the result of applied logical business algorithms.
Sell-Side Due Diligence
Credit: Donald J. Sauder, CPA
If you are thinking of selling your business, be proactive and not near-sighted in planning that sale. Sell-side due diligence is a reverse due diligence where you ask accountants or third-party advisors to perform proactive due diligence on your business, gearing it up for sale. These due diligence experts scrutinize your business for deal breakers and increase value. Investing in sell-side due diligence most often pays off for every seller.
First, sell-side due diligence helps identify problems and provide an opportunity to resolve those problems well in advance of presenting your business to a buyer. For instance, you have multi-state tax nexus, requiring your business to file tax returns in various states from activities in those tax jurisdictions.
If you have not filed taxes in various states that your business has nexus in, this potential liability could reduce value. Sales tax liabilities could another risk. Or, let’s say you have a warranty liability on a new product, sell-side due diligence will help you identify and resolve these potential problems well in advance of gearing your business up for sale. If you don’t correct these value reducers before taking your business to market, you could potentially break a deal or lose value at the negotiation table. Your sell-side due diligence team will create options to resolve these value reducers before they are brought to your attention from the buy-side due diligence team.
Secondly, what surprises do you need to avoid? How accurate are your internal financial statements for the years that will be scrutinized? How meticulous is your accounting software? What operations risk does your business have, or personnel resource concentrations ? Will your business’s greatest intangible–your experienced employees–stay if you sell the business? Do you need an accountant to fine tune your internal financial statements, to provide solutions to tax risks or to resolve book to tax differences? What about independent appraisals of fixed assets such as equipment or real estate?
Thirdly, a sell-side due diligence team will help you add value to the sale of your business asset. The objective analysis of your business’s financial performance, credibility of revenue forecasts, and specific niche buyer values, will help prepare you to contact buyers that could benefit from a strategic purchase of your business. Thinking through the questions that a buyer will raise and preparing responses will assist in making negotiations more smooth. Financiers will have questions about options on tax structures of the sale such as an asset sale or stock sale.
Is your business worth more as an entire unit, or could you sell divisions of your business in a “carve out” for more value? Where is the value in your business? Is it in real estate, intangibles (like goodwill or patents), equipment and machinery, or inventory?
Understanding what will interest a buyer, how they will pay for the purchase, and how it benefits them, will make closing the deal easier. Proper sell-side due diligence puts you in control during the sale, minimizes surprises, and adds value for you and the buyer .
Sell-side due diligence is about preparing for the potential buyer of your business before your business reaches the marketplace. Most businesses will be sold at some point due to family transitions, retirement, or other reasons. When yours does, plan ahead. Perform sell-side due diligence with your accountants and/or third part advisors. They will help you build trust and ultimately add value in the marketplace.