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VideoOn the Sell-Side: Why Sell‑Side Due Diligence Matters Before a Business Sale | Podcast
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Private Equity in Motion
In this episode of Weaver: Beyond the Numbers, Private Equity in Motion, Sean Muller and Brian Reed discuss how sell-side due diligence helps sellers identify financial and tax risks, prepare for buyer scrutiny and enter a business sale with greater confidence. They explore the role of proactive analysis in addressing potential issues early, supporting stronger negotiations and helping sellers navigate the transaction process from a position of strength.
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Detailed Description of On the Sell-Side: Why Sell‑Side Due Diligence Matters Before a Business Deal
00:00:00
Sean: I am Sean Muller and Brian Reed has joined me today. And we’re just going to talk about some of the issues that sellers look to when they go to sell their company.
So, Brian, why would you do a sell-side due diligence report?
00:00:13
Brian: There are a lot of reasons why somebody would want to do something like this — a sell‑side due diligence report — before they go to market.
One of them is to have a better understanding of what the risks are associated with the company from a financial perspective. It could be from a tax perspective.
00:00:36
Brian: You know, there’s a lot of things that you want to understand and have answers to, to identify potential areas that a buyer might use as leverage in the overall transaction. And so it’s trying to really understand, at a granular level, the business and the financial aspects and other general risk areas to be in a position to have a response and be in a position of strength rather than weakness.
00:01:15
Sean: So, I guess we can back up and say, what exactly is a sell-side due diligence report? What do you do?
00:01:21
Brian: So a sell-side due diligence report has many different aspects of that, right? And so I personally focus on the financial due diligence side, and what does that even mean?
00:01:33
Brian: It’s looking at a business, or an operation, at a granular level, focusing a lot on the P&L side — what the earning capacity is. Are they making accounting adjustments correctly on a monthly basis?
Are there nonrecurring items such as one-off expenditures for unusual legal expenses or implementation of software or something like that? But there’s other aspects — obviously, sell-side is not just financial.
00:02:10
Brian: It’s your purview with tax and other things to understand those areas that are important when you’re going into a transaction, because all of this, like I said before, is to position you so you’re in a position of strength.
00:02:28
Sean: So when you do this sell-side due diligence report, you analyze some risk, identify some different risk exposures. Do you just hand it over to the buyer and you’re done, or is the buyer going to do their own thing?
00:02:38
Brian: It would be nice if they would let things go that way. But that is not usually the way it goes.
And so, as part of our process, we continue to be involved because the buyer will typically do their own work. And that’s one of the other reasons why you want to do this — because they are going to do this work.
00:02:56
Brian: So you want to be in a position where you’ve identified these issues so that they’re not doing it first. And then, as part of our process, we’re there to support them — be the front line of defense answering questions as it relates to what the buyer’s representatives and service providers may have, to answer questions and pull together the information.
It’s a lot about being a quarterback and so the seller — you know, they have a day job — and this is helping them and augmenting their team so they can continue to run the business but also attend to selling the company.
00:03:42
Sean: So, really, the key here is you want to identify what’s there so you’re not blindsided if a buyer comes in. You kind of know what you’re looking for by this negotiation of strength you talked about?
00:03:52
Brian: I think that’s the primary reason. There are other reasons, but that’s the primary reason.
00:03:56
Sean: Okay. Well, thanks.
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