Should a sell side due diligence be an exercise where the consultant provides a financial due diligence report that presents the sellers business in its best light at the expense of overlooked problem areas, or should the consultant perform rigorous procedures to uncover potentially problematic issues that could disrupt the sales process if the buyer discovers them?
I think it is important to discover potentially problematic issue(s) early in the sell side due diligence so management can address these issue(s) before the company is put on the market or disclose the issue(s) to the buyer, so EBITDA multiple erosion does not occur (the act of reducing the purchase price because of the increase in risk).
The next question is who is best suited to perform this work?
Here at Henry+Horne, we have a deep bench of professionals who are experienced with transactions. For example, we can pull in tax professionals (federal, state, payroll and Nexis professionals to name a few) to assist in a stock deal, or we have experienced forensic and appraisal professionals who are able to complete the financial due diligence for asset purchases.
Typical areas we analyze are:
- Cost of revenue
- Selling and marketing expense
- General and administrative expense
- Other (income) expenses
- Cash requirements
- Working capital accounts
- Fixed assets
- State and local tax issues
- IT environment
- HR environment
- Management prepared forecasts or budgets
When is a good time to call us?
We recommend contacting us two to three years before the transaction date because time is needed to identify and fix any issues before the company is listed for sale.
And as an added benefit, all the documents can be stored in a data room for future reference when the buyer does do a financial due diligence. We know time kills all deals, so the ability for you to pre-load documents into a data room is very helpful to the deal timeline.
Mike Metzler, CPA, ABV, CMA, CGMA, ASA, Co Managing Director