Private equity exits are expected to increase during the second half of this year. One factor driving the growth in deal activity is the looming expiration of federal capital gains tax cuts, which is resulting in a hastening of the deal process to ensure completion by the end of the year.
With this heightened deal activity and greater scrutiny from many directions, the role of sell-side due diligence has never been more critical. Concerns brought to the surface by buy-side due diligence have increasingly delayed deals, caused them to fail or eroded the value of companies due to unanticipated issues. In this atmosphere, it is imperative to retain control of the sales process and provide a transparent, balanced and credible view of the business in order to establish trust with a potential buyer and expedite the deal timeline.
Sellers often underestimate the time and due diligence requirements of potential buyers. In certain situations an outside adviser may not be necessary; however, examples of where sell-side due diligence should be used are companies that:
• Have undergone certain transformational changes, such as leadership changes or acquiring or selling businesses or divisions
• Employ a lean accounting staff
• Have implemented or are in the process of implementing cost-saving initiatives
• Have suffered changes in customer base or employee turnover, especially in key accounting roles
• Have experienced growth
• Are considering the sale of a division or segment of a business
In these situations, sell-side due diligence allows the seller to avoid surprises, maintain control of the process and minimize disruptions, significantly increasing the probability of a successful transaction.
Learn more about sell-side due diligence, including how to alleviate the unique issues related to carve-outs and the value of uncovering and positioning tax liabilities and benefits, in McGladrey’s white paper.
By Michael J. Grossman and Patrick Conroy