How to Conduct Sell-Side Due Diligence + Template

In much the same way that buyers of businesses need to conduct due diligence to extract maximum value from transactions, sellers can maximize the value they gain from selling their business through conducting sell-side due diligence.

Below, we have together a list of steps to be followed in chronological order.

We at DealRoom help many companies organize their sell-side process and hope this serves as a useful how-to guide for owners of companies who are considering selling their companies at some stage in the future.

Suppose for a moment that you’re the buyer of a business rather than the seller. ‍

What kind of situations, personnel and documentation would you want to encounter in the business that you were buying?

Answering this question is the crux of sell-side due diligence. Sell-side due diligence addresses all of the issues that a well-organized buyer would raise in their own due diligence process.

In fact, whether you’re actively seeking to sell your business or not, it’s never a bad time to conduct sell-side due diligence.

Consider it a form of internal audit, whereby you take a critical look at what’s driving your business and where value-generating improvements can be made.

If, when conducting this sell-side due diligence, you find some aspects of the business you think would deduct from its value with a buyer, ask yourself why you’re willing to accept them.

What is the difference between sell-side and buy-side due diligence?

Sell-side and buy-side due diligence are essentially different sides of the same coin. Whereas buy-side due diligence is concerned with finding the potential weaknesses in a business, sell-side due diligence aims to ensure that there are none.

As such, many of the processes you need to undertake in sell-side due diligence are means to ensuring that buy-side due diligence can be conducted as efficiently as possible.

Why you need to conduct sell-side due diligence

Simply put, conducting sell-side due diligence ensures that your business is ready for a sale, even if you receive an offer out of the blue. Potentially valuable deals are lost every day because business owners usually don’t consider themselves to be ‘sellers.’

Let’s be honest for a moment here - if the right price comes along, we’re all sellers.

Thankfully, losing out on a potential sale because you’re not prepared is a completely avoidable situation.

1. Establish a motive

What’s your reason for selling the business? If you’re actively seeking to sell the business, you’ll need a good answer to this question as it’s likely to be one of the first three questions that many potential buyers will ask.

As always, it’s better to be honest if possible but avoid motives such as: “I think we’re at the top of the market now,” or even, “I’ve taken the business as far as I can.” You want to make the business attractive to buyers and that should be reflected in your motive for selling.

2. Analyze your financials

This issue is repeated over and over in M&A-related articles but that’s because of two things:

First, it’s of utmost importance to have a solid set of financials (whether or not you’re actively selling your business), and second, most SME owners are relatively lax on this point.

‍How often do you take the time to really get into the weeds of your company’s financial statements?

It’s rare that a business owner does so and doesn’t come away with at least some value-generating insights to improve the business.

More specifically:

• How do your margins compare to others in your industry?
• How is your inventory cycle and how does it compare to others in the industry?
• Are there any cash flow issues at your company that need to be resolved? (e.g. using company credit card too much)
• How does your working capital to sales ratio compare to others in your industry?
• Could you achieve finance at a lower rate than you’re currently receiving?

These are just some of the issues that we refer to when we say ‘analyze your financials.’

The full list of issues to be addressed under the financial umbrella is too large in scope to be covered by this article.

Financial performance is one of the most common reasons for deals falling through, and there is literally never a bad time to get on top of those issues, even if you’re not actively selling.

3. Ensuring your business is sustainable

Again, this is something of a catch-all headline, but no less important for it.

Sustainable in this context essentially means whether the business could continue growing after you’ve left it. No buyer would be interested in a business which is little more than a set of relationships that you’ve established with your sellers.

A significant proportion of small businesses - especially those in the professional services sector - fall into this category.

4. Ensuring Transparency

The nature of conducting business at a smaller, less corporate scale inevitably means that some business will be informal. Handshakes and cash payments are all too common. Even forms of barter trade are not unheard of:

Two companies providing services to each other without a dime being exchanged.

While this is a slightly more extreme case, it would be unusual for an SME not to have some informal dealings.

Take note of all of these and be transparent about their financial implications to your business.

Sell-side due diligence checklist or questions that should be asked

Access our pre-made, sell-side due diligence checklist here "Sell-Side Due Diligence Checklist Template".

Should you involve third party companies to perform sell-side due diligence?

Whether or not you hire a third party to perform sell-side due diligence depends on how much value you expect they can bring to the process.

The likelihood is that, whoever you hire, will ask questions you could ask and get the answers to (hence, the checklist of questions provided).

When bringing in third parties to perform sell-side due diligence, you’re essentially bringing in business consultants of some form, and this can become expensive quickly, so you should be very clear in advance about the deliverables you require from them.

Summary

Conducting sell side due diligence is a worthwhile exercise whether or not you’re actively seeking to sell your business.

The process forces business owners to take a more critical viewpoint of their business and its operations and perhaps even rethink how some aspects could be improved upon or even changed altogether.

It’s very rare that sell-side due diligence doesn’t generate significant value for owners of SMEs.