Singapore

Using Sell-side Due Diligence to Maximise Deal Value

As the vendor of a business in an M&A transaction, the goal is two-fold: Secure a successful transaction and Close at the highest price possible.

A thorough sell-side due diligence is a proactive way for a vendor to enhance both the probability of a successful transaction, and enhance the value of the company to the vendors. It is a due diligence commissioned by a vendor’s advisors on a business to identify its strengths, weaknesses and value. Given the current climate, a sell-side due diligence can help save potential heartache down the road, adding credibility to the sales process and even speeding it up.

Here are three (3) key dynamics that a sell-side due diligence can uncover to secure a successful transaction and close at the highest price possible:

Potential deal-breakers

1.      A sell-side due diligence helps to identify potential deal-breakers early in the M&A process. This provides management time to formulate strategies to address the potential deal-breakers uncovered, preventing them from becoming potential deal-breakers later in the sales process or accurately presenting the information to prospective buyers, including the development of credible responses that alleviates buyer concerns.

If potential deal-breakers are not identified and addressed early, sellers would risk being blindsided by such issue when they are highlighted during the buy-side due diligence process. By gaining a deeper understanding of the potential issues, a seller can help negate them or even turn them into assets that will benefit the sale.

Unclear financial narrative

2.      Many vendors have deep insight into the complexities of their businesses but find it difficult to articulate financial information that buyers are looking for in a concise and effective manner – it is either a lack of experience or due to the quality of data.

A sell-side due diligence process can help pull together the necessary financial, operational and tax data for a due diligence in advance, whilst validating the data available, increasing the credibility and confidence in the data. This in turn would enable the vendors to present an objective and credible narrative to a potential buyer. A sell-side due diligence process can peruse through financial information of the company and provides the seller with an objective and credible narrative that it is able to then be presented to potential buyers.

Value enhancement pre-exit

3.      A robust sell-side due diligence will help identify strengths and weaknesses of a business, allowing a vendor to enhance the value of its business in preparation for an M&A transaction. Amongst the areas that a vendor would be able to preserve and create value in are:

  • Prepare a robust business plan supplemented by financial projections, which are supported by measurable historical data and action plans.

A robust business plan supplemented by financial projections which are supported by measurable historical data and action plans will provide the business with a clear business direction in its growth strategy and its path to value enhancement.

  • Set aside time

An M&A transaction takes time and consumes resources. A robust business plan allows a vendor to focus efforts on the most important factor, delegating and communicating tasks to the management team to execute plans formulated, dedicating time to the M&A transaction process, and managing the different stakeholders.

  • Normalise the financials of a business

When a prospective buyer conducts his due diligence, the typical focus of the exercise is on any negative adjustments to EBITDA (earnings before interest, taxes, depreciation and amortisation) that could lead to a reduction in purchase price for the vendor.

By conducting a sell-side due diligence process, a vendor can get ahead of any potential risk areas (adjustments) that a buyer might identify, including adjustments which may have a positive impact on the EBITDA, and reduces the likelihood of renegotiations after the letter of intent has been signed. The negotiating power would have been shifted to the buyer at this point.

  • Enhance operation efficiency

Part of the business plan may include plans that enhance operation efficiency either through streamlining processes or even investment in technology.

  • Talent and quality management

Talent and quality management is important to ensure that the business continues to deliver the same value it has been delivering to its customers, if not better.

Having a sell-side due diligence report enhances the credibility of a transaction process, and better prepares a vendor for the transaction process ahead. Given the uncertainties in the current climate, a sell-side due diligence report can help vendors navigate these uncertainties and improve value to themselves.

RSM supports businesses with their merger and acquisition activities, from deal evaluation, financial and tax due diligence, to tax advisory services and even business modelling. If you would like to learn more about how we can support you in this exciting chapter of yours, we would be more than happy to speak to you.

Terence Ang 
Partner, Corporate Advisory; Head of Transaction and Valuation Advisory
[email protected]
T: +65 6594 7862

Doreen Quek 
Partner, Corporate Advisory 
[email protected]
T: +65 6594 7827

Tan Wenxue 
Director, Corporate Advisory 
[email protected]
T: +65 6594 7887