The Role of Financial Due Diligence in M&A

Any time you make a big purchase, you likely perform some kind of due diligence ahead of time, whether it’s a home inspection or something as simple as checking reviews before making your anniversary dinner reservation. The due diligence process, in other words, is usually thought of as the responsibility of the person making the purchase.

Sellers should also be proactively engaging in due diligence. One way our team at Symmetrical helps sellers accomplish this is by helping prepare their financial records, which can be a powerful way to attract potential buyers. Here’s what you need to know about the seller-side due diligence process.

Why Due Diligence?

Buyers looking to acquire another business inevitably perform due diligence, but proactively jumpstarting the process as a seller offers multiple advantages.

For one thing, it can show prospective buyers that your business is taking the process seriously and is invested in getting a deal done. By doing a thorough look under the hood of your business, you’ll be better equipped to answer any questions a buyer might have and to propose solutions to any potential problems a buyer might want addressed. In addition, you’ll gain a better sense of your company’s growth potential and competitive advantages, which will be a big help at the negotiating table.

What Due Diligence Entails for Sellers

One way to think of due diligence from the seller’s side is to gain an understanding of your company’s value. The main way to accomplish this is through a Quality of Earnings analysis. This analysis can include a range of metrics but typically focuses on EBITDA — earnings before interest, taxes, depreciation, and amortization. In some cases, we find that sellers actually underestimate their company’s value, and it’s only until the Quality of Earnings analysis that sellers realize the proper valuation of their company.

Other Types of Due Diligence

While an internal financial analysis is the most common type of due diligence for sellers, it’s far from the only kind of due diligence you can perform in advance of a sale. Sellers can also compile reports on the legal implications of a sale or produce analyses of the market and synergies that would be gained through a sale. These reports can be useful to you as a seller by giving you a better understanding of the value of your business in ways that aren’t necessarily captured by the bottom line.

At Symmetrical, we’ve seen firsthand how sellers who perform due diligence in advance of a sale often end up with the best deals. In M&A, trust and transparency are essential, so an engaged seller who begins the due diligence process in advance is often considered a major asset among buyers. Get in touch with us today to see how we can jumpstart your due diligence process and make the sale of your business a success.  

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