Why A Sell-Side Diligence Helps Valuation?
Updated: Jun 3
Companies that are being acquired have been increasingly and regularly running their own sell-side technical due diligence. The trend has significantly increased in the last few years as the sell-side diligence exercises provide significant value for both the buyers and sellers.
A great analogy is that if you are buying a used car and the seller provides you with a folder with orderly and regular maintenance records, it will increase your confidence level, gives you all of the information you need and you are less likely to negotiate. Compare that to a situation where there are no records and during the inspection, you discover that the breaks are not working when you take a test drive. The buyer will not only negotiate for a discount to complete the repairs, but the confidence level will be low. In an investment scenario, the confidence level is even more magnified because you will be working together in the future.
Here are the top six benefits and reasons why companies conduct sell-side technical due diligence.
Explore Risks Early: Helps the seller uncover issues and potentially resolve or put a plan in place to mitigate them.
Practice Makes Perfect: A sell-side helps a team practice and exercise what they need to do. This is especially important for teams that have not been through a similar process prior.
Diligence Is A Demanding Exercise: Having gone through one helps make the future process for potential buyers easier where the necessary documentation and data are prepared and ready. The headstart preparation also makes it easier on the team.
Uncover Blind Spots: Assessing oneself with an external unbiased view can provide an advantage point to point out blind spots that may not be visible to the team.
Increase Appeal: Being proactive and ready indicates commitment that makes sellers/companies more appealing for any potential buyer.
Trusted Documentation: The resulting reports are useful to both the buyers and sellers. The buyers will have a VDD (Vendor Due Diligence) report ready for their consumption and the sellers will have an internal report with improvement opportunities to address.
Is it too late to do sell-side diligence and a VDD report?
It’s never too late and you can still benefit. For maximum benefit, a sell-side due diligence process should start as early as possible, for example, 6-12 months at a minimum prior to a sale. There is a difference if you discover that the breaks on the car are not working well on the way to meet the potential buyer versus a month or two prior. The lead time gives the company ample opportunity to remedy any identified issues. However, there are benefits regardless of when you start.
Starting 1-6 months prior: You will be able to identify issues and be able to address some of them and in the least make a play of action for those you cannot fix. This provides transparency and trust with the buyer. Improving the roadmap, addressing some compliance and security gaps, getting the documentation and data in order, becoming ready for difficult questions, limiting potential surprises are all things you can address.
Starting 6-18 months prior: Can clearly provide more advantages where you can address technology gaps, software architecture concerns, close on security and compliance gaps, resolve unhealthy use of open source, optimize costs, fill role gaps in the organization, and increase product quality.
Finally, selecting a partner to conduct the deep technology sell-side due diligence should also be carefully throughout. The approach is different than buy-side diligence. An emphasis on being collaborative, efficient, holistic, and pragmatic with industry experience and a very deep technology lens are all important.
If you end up hiring a mechanic to diagnose the breaks on the car while it is being prepared to be sold, you would hope that they can diagnose it, tell you everything that needs to be repaired, save you money by telling you what is not important, and hopefully also help you fix those issues that must be addressed.
There are only gains by running a sell-side technical due diligence process and the benefits outweigh the investment. Start the sell-side technical due diligence early and commit to prioritizing and addressing all the issues that are possible to address while benefiting from the exercise.
About the Author
Hazem has been in the software and M&A industry for more than 26 years. As a managing partner at RingStone, he works with private equity firms globally in an advisory capacity. Before RingStone, Hazem built and managed a global consultancy, coaching high-profile executives, conducted technical due diligence in hundreds of deals and transformation strategies. He spent 18 years at Microsoft in software development, incubations, M&A, and cross-company transformation initiatives. Before Microsoft, Hazem built several businesses with successful exits namely in e-commerce, software, hospitality, and manufacturing. A multidisciplinary background in computer engineering, biological sciences, and business with a career spanning a global stage in the US, UK, broadly across Europe, Russia, and Africa. He is a sought-after public speaker and mentor in software, M&A, innovation, and transformations. Contact Hazem at email@example.com