The Difference Between Buy-Side and Sell-Side Due Diligence

buy-side due diligence

Buying or selling a business is quite a complex affair. No matter what side of the transaction you’re on, one of the most important steps in that process is proper due diligence.

Not only is due diligence equally important to both buyers and sellers, but both buy-side and sell-side due diligence come with specific benefits and areas of concern.

Buy-Side Due Diligence

When considering a potential acquisition, your goal is twofold: you need to find a company that fits in well with your overall objectives, and you need to obtain it at the right price. This is where a rigorous due diligence process can help.

Objective due diligence provides a factual assessment of important areas that you must consider before moving forward with the transaction. First, it will help you validate a company’s finances. Next, it will give you an insider’s look at strategic and operational characteristics of the company that may make the deal more attractive or put it out of the running altogether.

In-depth Financial Analysis

Numbers play heavily in any M&A deal, from determining the current condition and potential future track of a company you’re considering purchasing to negotiating the right price. Buy-side due diligence will help the buyer assess things such as the quality of earnings and cash flow, assets and liabilities, and working capital.

Post-purchase, the numbers acquired through the due diligence process can help the buyer better understand what factors will be important to ensuring growth and success in the future. With these numbers in hand, the buyer will be able to make educated decisions as they move forward.

Strategic and Operational Considerations

On its face, a company seems like a natural addition to your organization’s portfolio. Due diligence will help ensure that an acquisition is truly a good fit. It will also help reveal how operational costs and decisions are affecting the bottom line. The process also helps reveal potential weaknesses in the current personnel structure or company systems.

Having a complete understanding of the financial, as well as the strategical and operational aspects of the target, will help ensure a successful transaction and a valuable investment.

Sell-Side Due Diligence

As a seller, your goal is also twofold: secure a successful transaction and close it at the highest price possible. Taking time to perform due diligence beforehand will help give you a realistic valuation for your company before you begin the search for a buyer. It will also provide accurate information for you to present to potential buyers.

Address the Risks

Sell-side due diligence is a helpful tool to help expose risks early on in the process. This gives your company time to address those risks to prevent them from becoming potential pitfalls later in the sales process.

If these issues aren’t discovered early on, you risk being blindsided by them when they are exposed by the buyer’s due diligence in the midst of M&A negotiations. By understanding potential problems, you can help neutralize them or even turn them into assets that will benefit the sale.

Present Your Best Face

When you’re able to present a potential buyer with an objective view of the current status of the company, you build confidence in the overall value of the investment. This will help you avoid surprises and downward negotiations in price. In fact, it will increase competition amongst potential buyers and lessen the potential of lengthy, back-and-forth negotiations after a letter of intent has been initiated.

Proper Preparation — No Matter Which Side You’re On

Due diligence is an essential part of the M&A process for the parties on both sides of the transaction. Maybe you’re hoping to identify a solid and valuable investment or avoid a deal that could potentially end on a sour note. Perhaps you’ve been thinking of selling your company and aren’t sure where to begin in terms of valuations.

Whether you’re on the buy-side or sell-side of a purchase, thorough and objective due diligence is essential. As experts in both buy- and sell-side M&A, MelCap Partners has the experience to assist you with this process.

By Al Melchiorre

Al founded MelCap Partners in 2000, and is responsible for managing all aspects of client engagements from proposal through closing, developing business, reviewing offering memorandums and financial models, negotiating purchase agreements, and interacting with buyers and investors.