Rigorous due diligence is vital for investors who want to validate their investment theories and assess a target’s long-term growth potential. Sellers face increasing pressure for discerning buyers, and the due diligence process can substantially slow a sale. Sell-side due diligence can shorten the time to closing, increase sale price, and foster trust and cooperation between a buyer and seller. Here are five ways to get the most out of this process:
Assess Business Sale Timing
Whether there is neutral, negative, or positive customer feedback, sell-side due diligence is valuable. When there is positive feedback, it can support the value of the sale and confirm that the timing is right. Negative or neutral feedback suggests the need to implement changes which might improve satisfaction and loyalty, positioning the company for a more profitable sale.
Attract the Right Buyers
Your confidential information memorandum (CIM) likely paints a rosy portrait of your company. You’ll highlight strong customer relationships, growing market share, how you’ve positioned the company to be more competitive. This may be true, but if you want a buyer to pay a high EBITDA multiple, they need more than just testimonials and positive claims. Provide historical and financial data, as well as thorough documentation demonstrating healthy customer relationships.
Communicate to Control the Message
Buyers who receive a CIM immediately get to work checking its claims. Providing additional data pre-empts this process, allowing the seller to control the message and limit the number of parties contacting customers. This is a critical decision if the seller wants to keep the deal quiet, since inquiries from multiple companies may tip customers off to a pending sale. This pre-emptive process levels the playing field by ensuring prospective buyers work from seller-generated data. Sellers can also provide additional context that offers a more comprehensive and accurate understanding of the information revealed during due diligence.
Show the Runway for Future Growth
Buyers pay for a company based on their assessment of its future value, not its past or current performance. Past-sale diligence can substantiate value, but only by showing a viable growth potential. Can buyers attract new customers? Are there ways to innovate? What’s the innovation pipeline? How could a buyer make the company more competitive? What’s the future of this market sector? Sellers should be able to answer these questions in a way that appeals to potential buyers.
Shorten the Timeline
If the seller doesn’t undertake customer diligence, the buyer will as soon as a letter of intent is signed. Customer diligence before the sale shortens the closing timeline, and reduces the risk that the deal will fail during the window of exclusivity.
Sell-side diligence is standard operating procedure in most of Europe. So intelligent American firms are also embracing this approach. It offers buyers an objective view of customer relationships, which can then mitigate risk and inform the post-closing process. It gives the seller significant control over the process, and supports them to justify their asking price. That’s a win for all parties.
About Carpenter Hawke
Carpenter Hawke was founded in 1991 to provide expert M&A advisory services to sellers of privately owned businesses. Carpenter Hawke has successfully advised a wide range of clients looking for unconflicted advice on the sale of their business. Personal integrity and professionalism govern our performance.
Our experience and knowledge of the appropriate steps enable Carpenter Hawke to provide strategy and plan formulation to suit the needs of each sell side client. New England based but we work, Locally and Globally!