Sell–Side Financial Due Dilligence
A process whereby a seller engages an independent third-party service provider to undertake a financial due diligence analysis with respect to its business, as if it were from a buyer’s perspective.
The goal is to explain the financial “story” of the business in a user-friendly format that can be shared with potential buyers.
It is designed to identify strengths and opportunities as well as deal-closing obstacles, such as potential issues the business may have faced; how those issues impacted the reported historical financial results; and what steps the management team took in order to address them.
How Seller-Side Due Diligence is essential to support seller deal value?
- Buyers tend to have more confidence in financial data and thus the EBITDA and cash flow information they are presented with and will use to form a view on valuation.
- The risk of unwanted surprises during the buyer due diligence process is significantly reduced.
- There is a high likelihood of increased speed and certainty of the contemplated transaction closing.
Benefits of sell-side financial due diligence for the seller
- Unlocks value for the seller in a credible way: The identification, analysis, and detailed presentation of quality of earnings adjustments (“add-backs”) to historical reported financials is a key advantage of sell-side due diligence and which may increase the EBITDA. Since buyers use EBITDA as the basis for their valuation of the business, these actions could unlock value for the seller. Valuable add-backs or cost savings identified in sell-side due diligence usually are considered by the seller and the buyer in deal negotiations. These findings generally add to the incentive of a buyer to move forward and purchase the business.
- Leads to reduced surprises during buyer diligence: Potential issues should be identified and proactively addressed before potential buyer launch the sale process. This minimizes surprises during buyer due diligence and, in doing so, significantly reduces a buyer’s ability to seek price discounts during the sale negotiation process. These price chipping, even deal-breaking, considerations generally begin early in the mindset of the buyer. In our view, buyer due diligence discoveries, which are unwanted surprises to the seller, are the primary reason that sellers lose control in the sales process. In these instances there is a higher likelihood of a deal not succeeding – and therefore sell-side due diligence, as part of a well-controlled seller process, significantly reduces the risk of a broken deal.
- Friendly challenge:The sell-side process introduces a management team to the rigors of due diligence in a “dry run” format prior to buyers commencing their own buy-side due diligence. This allow management to be better prepared to address the buyer’s diligence questions related to the financial performance of the business.
- Supports and expedites the sale process:The goal of sell-side due diligence is for potential buyers to read the sell-side report and be left with a few areas of focus for their own due diligence.
- Positive signal to potential buyers: Buyers view this kind of preparation by the seller as allowing a potential buyer a clearer path to better understand the financial performance of a business before starting to incur its own buy-side financial due diligence costs.
Quality of Earnings
Financial Statements Review:
- Income Statement: Analysis of revenue, expenses, profitability, and trends over the period “2023 and 2024”
- Preparation of recast Profit and Loss statement showing adjustments for each period.
- Review & analysis of revenue and cost drivers
- Balance Sheet: Examination of assets, liabilities, equity, and key ratios
- Review of depreciation and amortization policies
- Preparation of recast Balance sheet showing adjustments for each period.
Quality of Earnings (QoE) Analysis:
- Verification of revenue and expense recognition practices.
- Identification of non-recurring or unusual items affecting earnings.
- Evaluation of adjustments required for normalized earnings.
- Customer and supplier concentration analysis
- Preparing month-to-month adjustments
- Summarizing all adjustments on year-to-year basis
- Reviewing Bank reconciliations to ensure that no transactions in bank or credit cards accounts is missing or duplicated in the books
Financial Ratios and Performance Metrics:
- Performing vertical analysis of P&L for all the periods covered in the scope.
- Performing horizontal analysis of P&L for all the periods covered in the scope.
- Performing Gross Profitability analysis and EBITDA analysis.
- Calculation and analysis of key financial ratios (e.g., liquidity, profitability, leverage).
Preparation of Adjusted Profit and Loss and Balance Sheet after considering all Due Diligence adjustments.
- Review of historical financial performance to identify trends and patterns.
- Preparation of Adjusted Profit and Loss and Balance Sheet after considering all Due Diligence adjustments.
Report & Data Room Preparation:
- Executive summary - company overview, overall performance and summary on overall business.
- Preparation of data room for all add backs.
- Notes and explanation of all due diligence adjustment on QoE
- Financial statement analysis - Revenue and expenses analysis, showing trends and year-on-year comparisons.
- Inclusion of data visualizations and charts.
Sell–Side Financial Due Dilligence | FAQs
What is seller-side due diligence?
Seller-side due diligence is a preemptive evaluation of your business to identify and address any issues before a buyer conducts their own review. It helps streamline the sales process and build buyer confidence.
Why is seller-side due diligence important?
It minimizes surprises during the transaction, reduces negotiation time, and ensures that your business is presented in the best possible light to potential buyers.
We have audited accounts, so won’t sell-side financial due diligence be duplicative?
Often, sellers do not see the need for sell-side due diligence as they have audited financial statements, and as such consider the financial records of the business to be “clean”. Audited financials do not reflect “deal financials.” It is the deal financials upon which buyers base their valuation. Buyer due diligence cleanses the financials for out-of-period costs, non-cash items, and illustrates pro-forma considerations to maximize value for the buyer and provide a rationale for a reduction of purchase price. Indeed, if a seller merely shares GAAP basis financial information with a buyer, the seller is likely to experience a significant loss of value.
What financial documents are needed?
- Monthly P&L, Balance sheet with General Ledger
- Tax returns.
- Bank statements and credit card statements with reconciliation
- Forecasts and budgets, if available
- A detailed list of information and documents required shall be shared through a query sheet once the engagement letter is signed.
How long does the due diligence process take?
Typically, it takes 3–6 weeks, depending on the complexity of your business and the scope of the review.
What if books are not reconciled and contain errors?Is book cleaning included in the package?
Low-level/Lite cleaning and reconciliation shall be included in the package. However, books, that required extensive cleaning and reconciliation shall be charged separately at competitive pricing.
What are the key steps in seller-side due diligence?
- Gathering financial, operational, and legal documents.
- Conducting internal reviews and audits.
- Addressing red flags and preparing a data room for potential buyers.
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Case Studies
Case Study: FP&A & M&A Support for a Global Renewable Energy Group
Case Study: Maximizing Business Valuation for CBC, a Healthcare Provider in California
