Conducting sell-side due diligence helps increase the probability the sale of a business will be successful. Performed correctly, the process uncovers opportunities for sellers to enhance their company’s value prior to a sale while helping facilitate a faster close time.
In the food, beverage, agribusiness, and related sectors — where there’s heightened M&A activity and intense competition for growth — companies contemplating a sale can often benefit from leveraging sell-side due diligence to advance their strategic goals.
Here are answers to some of the most important questions facing sellers in these markets prior to and during the process.
What are the benefits?
Sell-side due diligence is a proactive process that involves identifying and assessing issues and trends that either positively or negatively impact business value from a buyer’s perspective. Business owners gain early, vital insights this way, which can help establish a strategic framework for selling a company later on.
Presenting favorably
Armed with the due diligence findings, sellers can address weaknesses prior to a sale and prepare for questions they’re likely to face from buyers. The process also provides sellers a reality check against their own expectations of business worth and deal value. With greater control over the sale narrative, sellers can project greater confidence in their position, helping to bolster a buyer’s perception of the company.
After conducting sell-side due diligence, companies are also often better positioned to avoid major surprises or gaps in expectations that could delay or kill a deal. There are also generally fewer unforeseen costs and added professional or consulting fees, which can result from a lesser degree of preparation.
Enhancing deal value
Insights gained from the due diligence process often point to transaction structures that could help increase deal value as well as after-tax proceeds. By identifying weaknesses that could reduce deal value, sellers can usually anticipate buyer negotiation tactics as well.
By proactively managing the way issues, processes, accounting policies, and other aspects of the business are explained during negotiations, sellers can also better anticipate buyers’ questions, keeping the discussion focused on the strategic basis for the transaction.
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Managing workflow
Sellers can leverage due diligence insights to proactively manage the stress of a future transaction on a business by gathering company information that will be requested by a buyer in advance.
The demands placed on a company’s internal resources to support a transaction can be intense, and senior management is usually hit hardest as they struggle to balance go-to-market preparations with maintaining successful operations. Sell-side due diligence helps avoid excessive demands on management’s time and eases the potential disruption of buyer requests.
What are the key concerns for companies preparing for a sale?
Performance metrics such as gross-to-net sales and gross margin by product, customer, and channel are essential as a company goes to market and will invariably be viewed closely through a buyer’s lens. However, many companies in the food, beverage, and agribusiness industries aren’t proficient at properly tracking and accounting for inventory costing and sales incentive activities.
Sell-side due diligence helps sellers identify and address weaknesses such as these that are specific to their company.
Common seller weaknesses
These are some additional areas where food, beverage, and agribusiness companies can fall short:
Cost Accounting Systems — Accumulating product costs and inventory may be limited by a company’s cost accounting system, but buyers need hard data to understand profitability by product and customer.
Purchasing Systems — Capturing ingredient cost trends and the impact on gross margin isn’t often part of a company’s purchasing systems; however, it’s information that buyers will want to know.
Up-to-Date Inventory Information — Companies often lack the inventory systems and the data required by buyers to assess the historical yield rates, product expirations, and potential reserves needed on balance sheet accounts.
Trade Spending — Branded food companies are frequently limited by systems or staffing to properly track promotional incentives provided to customers, such as slotting, rebates, and markdowns. Buyers will want to understand the impact of customer arrangements and commitments on both the balance sheet and net sales.
In the event a company decides not to sell, it’s stakeholders have still gained invaluable insight about the organization’s profitability, performance, and other drivers of value they can then focus on improving.
When should companies think about preparing for a sale?
Businesses should start preparing for a sale three to five years in advance. This timeframe provides the sellers ample opportunity to begin positioning the company for sale, preparing multiple years of performance data, and putting systems and information in place that’ll be seen as desirable by potential buyers.
Final preparations, including conducting sell-side due diligence, should begin six to twelve months prior to the anticipated go-to market date. This allows enough time for the seller to organize financial information and prepare management for a potential buyer’s due diligence process.
How do accountants and investment bankers fit into sell-side due diligence?
Sell-side due diligence is typically performed by certified public accountants. The reports provide credible financial information — such as potential adjustments to earnings — that investment banks rely on and include in an offering memorandum. The accountants also assist with preparing management to explain financial information to potential buyers in terms consistent with standard accounting practices.
Investment banks focus on positioning a company for sale and finding the best buyer for it. While they often accumulate significant information, they don’t necessarily identify and address accounting issues in the level of detail that would be covered in sell-side due diligence.
Is it important to have a service provider with strong industry experience?
Experience in a seller’s industry is a prerequisite to making sure sell-side due diligence is performed and presented in a way that’s consistent with how buyers in the industry will consider the transaction. It’s also key to understanding industry-specific practices that are relevant to assessing current and future earnings, accounting policies, and trends.
Industry experience becomes even more important for sellers with less sophisticated accounting and finance functions, since the company’s reported results may not be consistent with standard industry formats.
What can companies do if deficiencies are found?
Deficiencies found during sell-side due diligence can and should be mitigated. It’s important to note, though, that when it comes to changing policies, reporting, or processes, the closer companies are to a planned transaction, the more difficult it becomes for buyers to assess what’s normal or the impact of those changes.
If possible, sellers should avoid making changes to significant accounting policies and financial reporting systems within a year or two of a sale. Having consistent information makes it easier for buyers to assess the merits of a transaction.
To the extent deficiencies are found, pro forma adjustments can be made during sell-side due diligence to account for these items, rather than changing the underlying data in the system.
Can sell-side due diligence help address industry trends?
The process can help an organization prepare for and proactively manage outside factors, such as:
Commodity and labor prices
Since 2016, commodity prices have increased. Being able to explain the impact of fluctuating costs for materials, labor, and overhead on gross margin is critical during the sales process.
Customer concentrations
Food companies will often have a high level of customer concentration among the major retailers and club stores. Management will need to be able to demonstrate to a potential buyer the strength of the company’s relationship with key customers and product longevity. A seller will also be looking to understand how the shift from brick-and-mortar purchases to online could impact the company’s sales.
Debt leverage
Increasingly, debt leverage is being used to fund transactions. Because of this, normalized earnings before interest, taxes, depreciation, and amortization (EBITDA) has become more crucial to supporting buyer valuations and acquisition models. Surprise adjustments become even more problematic in these scenarios.
Paying more for a good reputation
Buyers are generally willing to pay more for companies with good brand reputation and recognition. The extent to which a seller is prepared to tangibly demonstrate these attributes can help to enhance buyer perceptions exponentially.
Legacy brand acquisitions
Large corporate buyers continue to be interested in acquiring smaller emerging brands rather than developing new product lines internally. The demands and information expectations of these legacy-brand buyers can be even more rigorous during the sale process than other, smaller entities.
