The Value Proposition Of Sell-Side Due Diligence in M&A

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In every M&A transaction, it’s a given that potential acquirers will conduct due diligence on the company on which they are bidding. But what about the seller? In many cases, sell-side due diligence is considered optional. However, there are benefits for sellers that are often overlooked; not least of which is the potential that, by investigating and mitigating issues ahead of the negotiation, sellers can increase the price and accelerate the timing of the sale, gaining an upper hand in the deal process.

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Improved Price and Timing

The benefits of price and timing are intertwined.  Specifically regarding price, a seller who conducts due diligence is able to identify adjustments that positively impact earnings and can minimize buyer negotiations after the letter of intent, often resulting in a higher initial bid. And performing sell-side due diligence can sometimes make it easier to attract buyers because they often show more interest when this process is carried out.

Since timing can affect price in quick market, helping buyers reduce the time required for its own due diligence can result in a more generous offer. Timing efficiencies can also be achieved by having accurate historical and projected financial information and by addressing risks and fixing any major issues early in the process, ultimately reducing the back-and-forth inquiry process, which can sometimes take months. This is especially important for companies that are selling an asset or the entire business for the first time, since they may not foresee all the elements that will be scrutinized closely by potential buyers.

Know Thyself

According to research conducted by UC-Davis Graduate School of Management Professor Hollis Ashbaugh-Skaife, low-quality financial reporting correlated with a higher rate of deal cancellation, increasing the failure rate by more than 9 percent. The quality and structure of a company’s accounting practices is one of the main focal points of sell-side due diligence, making it possible to catch potentially influential miscalculations. With the help of sell-side due diligence, critical issues can be identified early on and be resolved in a timely manner.

Critical Difference

Sell-side due diligence was conducted in 63 percent of all sale processes in 2016, according to a recent survey by MergerMarket, showing that, while fairly widespread, it is still far from universal. Sellers who didn’t conduct sell-side due diligence offered a variety of explanations for that decision including the extra expense was not worth the cost relative to size of the asset being sold, they don’t trust the results, or concerns that the extra step may slow down the sale.

Even with these reservations, sell-side due diligence should be considered before selling a company.  As the speed at which deals are done continues to increase, careful review of your business in the early stages of going to market has never been more critical. Auditing your business’ financial position provides an opportunity for remediation of any uncovered issues, which can maximize the transaction value and speed up the sale process. Sellers will also have a much better chance of impressing buyers, increasing their sale price and reducing the potential for transaction.

Craig Clay is the President of Global Capital Markets at Donnelley Financial Solutions.

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