For many, selling your company will be the most significant transaction you are a part of in your business career. But it’s a complex process that can be fraught with considerable challenges along the way. Today’s business environment brings even more intense scrutiny from potential buyers, and issues that were once considered minor could now delay a deal or even wreck it altogether. In order to maximize value for their business, more sellers are investing in sell-side due diligence before beginning the actual sales process.
Market Conditions – Sellers’ Market
According to recent reports on the state of Private Equity, the amount of dry powder (un-invested capital) reached an all-time high at $1.47 trillion in 2016 per the Global Private Equity Report 2017 from Bain & Company. In addition to record levels of dry powder, acquisition multiples rose to record levels. Average EBITDA multiples for US LBO transactions reached 10.9x in 2016.
However, despite the favorable market conditions, it is no guarantee that sellers will actually maximize the selling price. Effective sell-side due diligence can be the difference maker to ensure sellers achieve maximum value for their business enterprise.
Why Perform Sell-Side Due Diligence?
Sophisticated buyers will undoubtedly perform an extensive due diligence process to clearly understand the business they have an interest in purchasing and uncover any risks. Such risks are likely to be translated into purchase price reductions.
Sellers can get ahead of any potential risk by having an independent and objective analysis performed, thus providing the seller with leverage in negations. The benefits of sell-side due diligence are numerous including:
- Providing a level of credibility to the financials and key performance indices including of course EBITDA, normal levels of working capital, and net assets and a Quality of Earnings analysis
- Identifying adjustments that positively impact EBITDA (these are seldom found in the due diligence performed by the buyer)
- Avoiding surprises, which increases leverage in price negotiations and allows your investment banker to run a more efficient sale process
- Analyzing tax risks and opportunities associated with various deal structures
- Being able to focus on running the business by hiring a professional to handle this aspect of the deal
A Smart Move
Like any other high-value professional service, quality due diligence should pay for itself in terms of deal process efficiency and ultimately purchase price. At current deal multiples (say 7-10x EBITDA) it doesn’t take long for a well-performed Quality of Earnings analysis to provide a positive return on investment.
With market multiples at or near record levels, sophisticated buyers may utilize the due diligence process to negotiate a lower purchase price. But sellers can level the playing field, increase their leverage in negotiations and ultimately maximize enterprise value by employing the same techniques to their advantage.
Frank Stumpo, CPA, MBA is a Director in AC Lordi’s Office of the CFO practice, having spent over two decades as a seated CFO. He has extensive experience identifying and implementing strategies that maximize revenues and improve operational efficiencies within start-ups, M&As and multi-billion dollar global organizations. He can be reached at firstname.lastname@example.org or 610-738-0100.