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Best Practices for Due Diligence Support

Selling Your Business? Know the Best Practices for Due Diligence Support

How much is your business worth? That’s a subjective question that doesn’t always have a clear cut answer.

When it comes time to sell, the only thing that really matters is how well you can communicate the value of your business. Making a sale is all about providing the right value proposition to the right buyer.

Articulating that value begins with sell-side due diligence. 

What is Sell-Side Due Diligence?

Sell-side due diligence is a proactive measure taken by a potential seller to identify the strengths and the weaknesses of the business. This data will ultimately drive the valuation of the firm. Sell-side due diligence is an exercise taken before engaging in talks with potential buyers. 

During this analysis, the business owner(s) look at margins, inventory cycles, working capital, and projections–collectively referred to as the ‘financials’ of the business. The goal of this analysis is to identify strengths and weaknesses relative to current industry and market conditions. 

Having this information helps the seller leverage strengths to formulate a compelling narrative as to why this business is special and differentiated. It also helps better identify weakness and preemptively mitigate those factors. All of this drives valuations and provides a stronger negotiation position.

Why You Need to Invest in Sell-Side Due Diligence

To put it simply – sell-side due diligence puts you in a better position to have a successful outcome in your transaction. 

By entering into an opportunity to sell with this level of transparency, you can establish trust and credibility right off the bat. 

Your proactive due diligence helps:

  • Establish Your Reason for Selling
  • Clean Out the Cobwebs in Your Financial Records
  • Prove Your Business is not only Profitable & Sustainable but Differentiated
  • Find Value-Add Opportunities to Leverage in Negotiations

Best Practices for Sell-Side Due Diligence

Now that we’ve made the case for a sell-side due diligence, let’s talk about when and how to get the job done right.

Growth-Stage Companies

Businesses expanding into new markets are primed to attract late-stage investors or strategic buyers. For these companies, sell-side due diligence is a way to validate growth and prove sustainability. 

At this stage, due diligence should dig deep into analyzing product development costs to identify gaps in critical areas. A sell-side due diligence can prepare your financials for the intense scrutiny that growth stage buyers are most interested in. 

Best Practice: Showcase Your Growth with Clean, Complete Data

Let’s take a look at an example:

Sell-Side Due Diligence Boosts Value in Growth-Stage Companies

A clothing company with an established wholesale distribution network and direct-to-consumer (DTC) e-commerce channels is looking for a capital infusion to fund future growth. The company had $32M in annual revenue valued at $85M. 

Before getting into the nitty-gritty with potential investors, the founder chose to consult an advisory firm to conduct a sell-side due diligence. The company’s financials were in good shape, but just one year prior the company had experienced some turbulence during a rough technology transition.

In this instance, it was imperative to identify and isolate financial data impacted by the failed technology transition. And, more importantly, to show accurate historical trends with data points that matched the technology transitions explained by this one-time event.

Understanding that growth-stage investors would be most interested in the lifetime value of a customer, the company needed rock-solid explanations for events like lost search engine rankings for product pages resulting in significant revenue decline over several months.

On paper, the company had lost more than $1M in sales revenue approximately twelve months prior to seeking investors – that’s not a scenario that screams ‘good investment opportunity.’ However, a thorough sell-side due diligence provides transparency and credibility that attributes those (now recovered) losses to a specific, non-repeatable event.

The whole point of a sell-side due diligence is to connect these dots for potential investors so that they can see the whole picture.

Mature Companies

Mature-stage companies have well-defined products and processes and are well-established in their markets. These companies attract a variety of buyers for many different reasons – including predictability, access to skilled talent or an established customer base, and brand recognition.

And often, the sellers behind these companies are ready for retirement, moving onto a new challenge, or feel otherwise tapped out. The sellers desire to move on can sometimes cause them to undervalue their mature business.

In this case, sell-side due diligence is an imperative step to combat bias. It often provides a fresh set of eyes that disrupts ‘the way things have always been’ and introduces new ideas that lead to added value and better deal outcomes.

Best Practice: Focus on Transparency & Drive Value

Let’s take a look at an example of how sell-side due diligence can add value:

Sell-Side Due Diligence Adds Value & Provides Transparency

The founder of a $200M heavy equipment manufacturer was ready to move on to a new business venture after 22 years in the industry. Before making any big moves, the founder hired a financial advisory firm to conduct a sell-side due diligence in preparation of a potential sale.

The goal of this due diligence was to review operations and identify opportunities to gain efficiency by streamlining processes or cutting costs. As a result of a comprehensive review of supply management practices, continuous process improvement activities, and day-to-day operations, the sell-side due diligence resulted in a plan that saved the company $4M in annual operating expenses, reduced inventory costs by $1.6M and lowered labor costs by up to 5% across the organization. 

In this case, a sell-side due diligence was able to provide transparency into the operational efficiency of a mature company and add value that netted the founder a higher sale price and greater confidence in negotiating deal terms.

Sell-Side Due Diligence Makes All the Difference for Mature Companies

At this stage, you should be approaching a potential sale with confidence. You have built a viable company that has a proven track record and strong leadership – and now, it’s time for you to step away. 

Potential buyers will look at how every dollar is spent, closely evaluating the strength of your management team and the efficiency of your operations. All-in-all, the bar is set high with very little forgiveness at this stage.

Startups can lean on the promise of potential to attract investor dollars with new and shiny possibilities. Growth stage companies can lean on the untapped potential in customer loyalty and product improvement to attract buyers looking to capitalize on a proven idea with room to grow. 

By comparison, mature companies have less flexibility – they’re either making money or they’re not. If they are, the sell-side due diligence will prove their worth. And if they’re not making money, the sell-side due diligence will help identify weaknesses that can be framed as opportunities for the right kind of buyer.

What to Expect from Due Diligence Support

Due diligence is an important step in the process of selling a business. While you can probably make a little headway on your own, the perspective of a third-party is invaluable. An advisory firm that knows the business-end of the deal well can provide a meticulous,unbiased review that compares your business against the competition across the market.

The same firm that helps you navigate negotiating term sheets, signing a letter of intent, and closing a deal can also help you take preventative steps that prepare you to approach a potential sale in a strong position.

As you begin to take your next steps, consider choosing an M&A advisor that is well-versed in sell-side transactions to help you prepare with proactive due diligence.

The firm should have strong evidence of past success in financial planning and analysis, as well as breadth of experience in mergers and acquisitions. Some of the things that you should be looking for in a firm for due diligence support include:

  • Experience
  • Team Composition
  • Scope of Support
  • Firm Structure
  • Fee Model

How Embarc Advisors Can Help 

Embarc Advisors is an experienced M&A advisory firm. Our team has a wide breadth of experience stemming from decades of brokering business deals in the upper echelons of finance – like Goldman Sachs and McKinsey.

But we specialize in making enterprise-level financial support accessible to middle market businesses. When it comes time to sell, our team can provide sell-side due diligence that prepares you to take the next step with confidence.

For growth-stage companies, we can quantify your success and your potential. And for mature companies, we can find value that you didn’t even know you had.

Embarc Advisors does this all with a streamlined, efficient approach that prioritizes high-impact results. This means, instead of spending six months pouring over every document, we prioritize the details that will make the most difference.

If you’re ready to begin exploring your options, get in touch with Embarc Advisors today. Or, learn more about how financial planning and analysis can benefit your business with our blog on How FP&A Can Save Your Company Money.

See the Difference that Embarc Advisors Can Make for Your Business

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