Knowledge and Insights

Buying or selling a business is no easy task. One of the most critical steps in that process is performing adequate due diligence, no matter what side of the transaction you are on. In this article, we’ll review buy-side vs. sell-side due diligence – how they work, benefits of each, and things to consider during the due diligence process.

THE IMPORTANCE OF DUE DILIGENCE

Due diligence is an evaluation process that typically spans a wide range of areas including financial, legal, operational, IT and marketing matters.  Although audited financial statements provide a starting point for a potential investor’s assessment of a target company, they generally do not comment on the company’s ability to sustain and grow earnings, the feasibility of management’s forecast and insight into historical working capital needs.

BUY-SIDE DUE DILIGENCE

As a buyer considering a potential acquisition, it’s important for you to not only identify a solid company that aligns with your overall business objectives, but also to acquire it at a fair price.  Proper due diligence provides an objective and in-depth assessment of key areas that a buyer should consider before moving forward with the transaction. For example, performing various financial analyses will help the buyer assess specific key risks involving the quality of earnings, cash flow, assets, liabilities, and working capital.

In addition to shedding light on the target company’s finances, the due diligence process will provide an inside look at strategic and operational characteristics of the company that may make the deal more attractive or take it off the table altogether.

Post-acquisition, the intel acquired through the due diligence process will help the buyer understand the driving factors important to ensuring growth and success in the future. With this information compiled, the buyer should be in a position to make educated decisions as they take the company forward.

From a strategic and operational perspective, performing due diligence will reveal how operational costs and decisions are affecting the company’s bottom line and expose potential weaknesses in personnel structure or internal systems.  Having a wholistic understanding of the financial, strategical, and operational aspects of the target company will increase your chances of a successful transaction and maintaining your valuable investment well into the future.

SELL-SIDE DUE DILIGENCE

In most cases, a motivated seller’s goal is to close a successful transaction at the highest price possible. Setting aside appropriate time to perform sell-side due diligence before you go to market will give you a realistic valuation for your company and provide accurate information for you to present to potential buyers before you begin your search.

Sell-side due diligence, when properly planned and executed, often exposes unknown risks to the transaction, which allows the company adequate time to address those risks to prevent them from becoming pitfalls later in the sales process.  Identifying issues early on is critical – otherwise you risk being blindsided when they are ultimately exposed by the buyer’s due diligence team, usually during key negotiations. By understanding potential problems upfront, you can help neutralize them and, in some cases, even turn them into positives that will benefit the sale.

If you proactively present a potential buyer with an objective view of the company, you build confidence in the overall value of the investment you are marketing for sale. Doing so should also help you avoid surprises and downward negotiations in price and lessen the potential for lengthy, back-and-forth negotiations after a letter of intent has been signed.

PREPARATION IS KEY

Due diligence is an essential part of the M&A process for parties on both sides of the transaction. However, proper preparation is key, especially if you’re looking to evaluate a complex investment opportunity and avoid a deal that could potentially go sideways.

Buy-side and sell-side due diligence comes with specific benefits and areas of concern. As experts in both buy-and sell-side transactions, Mercadien has the resources and experience to assist you with all phases of the M&A process.

If you’re interested in adding an experienced advisor to your M&A team or would like to learn more about how Mercadien can help you through the M&A process, contact us today.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.