Why all businesses considering a sale should undertake “Sell-Side Due Diligence”?

11th May 2015 by Fiona Hotston Moore

As we continue to see an upturn in activity in sales and mergers it is clear that in a competitive market, with funders requiring greater confidence in the business, advisers and business owners are recognising that robust sell-side analysis pays dividends in the consideration received as well as the time taken to complete a transaction. The professional fees and time involved in doing the sell-side due diligence is a worthwhile investment to increase the perceived value of the business and to facilitate the completion of the buyer due diligence.

The key reasons to consider sell-side due diligence include:

Normalised earnings

The adviser will prepare a summary of the sustainable profits of the business which may not be the reported earnings. The sell-side due diligence report considers the costs and expenses that will not exist post transaction and includes adjustments for the impact of certain accounting standards etc. The normalised earnings will adjust for changes to the business that have been undertaken, perhaps in anticipation of the sale. There is often an adjustment to remove the owners drawings and replace these with a market rate for an appropriate managing director. As the buyer will often value the business on a multiple of the earnings it’s important to present this upfront.

Carve out transactions

If only part of a business or group of companies is being sold it’s important to present the expected normalised results of the standalone business. The buyer will expect to see a detailed bridge reconciling the results in the statutory accounts to the projections for the ‘carve out’. At this stage in a ‘carve out’, the due diligence will also consider what if any services the “carved out” business will need from the seller post completion. These will be covered in a “Transitional Services Agreement” and it will assist the process to include a draft in the due diligence pack provided to the prospective buyer.

Tax due diligence

The seller should consider potential tax issues and efficiencies and how structuring could assist in these.

Working capital analysis

It is essential to facilitate a smooth transaction so that the seller determines the target working capital required by the business and presents this in the sell-side due diligence report.

Legal due diligence

The buyer due diligence will involve reviewing various legal and statutory paperwork including commercial contracts, leases, employment contracts, tax filings and more. All of this can take considerable time to assemble. This can delay completion of a transaction and very occasionally during this delay the buyer may even pull out due to unforeseen circumstances or a more attractive business comes on the market. Sell-side due diligence will include collation of the legal documents ready for the buyer due diligence team.

Independence

Whilst the adviser will be engaged by the prospective seller they bring an objective view and can prepare the pack the buyer will require and assist in information requests during the process. It is often helpful to have this process handled by trusted advisers who are not personally involved in the business rather than the owner or management team.

Finally, sell-side due diligence should be customised for the business and proportionate to the anticipated business value. It can be a two page report or a considerably larger, more comprehensive document. It will however assist in achieving the maximum value for the business and the chances of a successful completion. Few sales run smoothly but experience tells us that sell-side due diligence can pay dividends when issues come up that could jeopardise the transaction.


Author

Fiona Hotston Moore

Fiona Hotston Moore

Partner
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