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Divesting for value: Sell-side due diligence - EY - Global

Divesting for value

Sell-side due diligence

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Sell-side due diligence requires the seller to think like a buyer, discerning what drives value.

Sell-side due diligence is a cornerstone of divestiture preparation and strategy, enhancing seller credibility and deal value for both buyer and seller.

Key points:

  • Conduct sell-side due diligence to build a strong value case for the deal and avoid costly surprises
  • Define due diligence broadly, to include financial, tax, accounting, compliance, operational transition and synergy issues
  • Establish an electronic data room, supplied with transparent, consistent information
  • Build a “synergies story”

Sell-side due diligence is a staple of the divestiture process. Once the divestment decision is made, sell-side due diligence compels the seller to examine the business from potential buyers’ perspectives including relevant opportunities, risks, synergies and other salient issues.

Sell-side due diligence requires the seller to think like a buyer, discerning what drives value and where potential risks may exist. This can provide the seller with a unique advantage in negotiations that can help maximize value in a divestiture.

To view a transaction through a buyer’s eyes, it is essential to understand the likely pool of buyers and their different needs and views on value. The onus is on the seller to identify a sound value story and illustrate how current and future financial performance reflects that value proposition.

Sell-side due diligence helps prepare management to respond to buyer questions and challenges with fact-based positions of strength. A well-prepared management team is able to articulate a sound strategy and reveal detailed knowledge of what has driven historic performance, and what likely could drive future performance.

Focus areas

Sell-side due diligence should be both broad and deep. This means addressing such factors as historical financial results, pro forma and forecast financial results, the specific assets involved in the deal and implications for the seller’s remaining businesses, including stranded costs and discontinued businesses.

Principal forms of sell-side due diligence

Sell-side due diligence can aid the buyer and thus add to the attractiveness of a transaction. A supplement to the offering memorandum, which is the primary selling document, can vary depending on the nature of the sell-side due diligence.

The main forms include:

  • Independent report. An independent report is developed by a qualified third party. For example, EY’s sell- side due diligence report (SDD) provides potential bidders with information to assist in their decision making and due diligence. It includes detailed analysis of the financial aspects of the transaction, along with relevant commercial and operational details. An SDD also delves into key separation considerations.
  • White paper. An alternative to an SDD is a due diligence white paper. Prepared by the seller, this consists of schedules, analysis and accompanying memoranda identifying key issues and matters of potential interest to the purchaser. This information can be provided to buyers or used for management purposes only.

The key advantages of sell-side due diligence are as follows:

  • Clarity, particularly when explaining a complex carve-out or a complex business model
  • Up-front communication, providing bidders with an early notice of potential challenges or untapped value
  • Efficiency, enabling the seller to simultaneously address the diligence requirements of multiple bidders
  • Focus, streamlining demands on management, enabling greater focus on the ongoing business during the sale process
  • Speed, often reducing bidders’ overall information demands and accelerating deal processes

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