Sell Side Due Diligence

last updated on 22 February 2022 | Reading time: approx. 3 minutes

 

In the transaction process, buy side due diligence (Buy Side DD) often costs pre-cious time. In order to optimise the sales process, it is advisable for the seller to commission due diligence (Sell Side DD) of its own company. Sell Side DD makes it possible to provide prospective buyers with all information relevant to decision-making as soon as they contact the seller. Furthermore, it helps avoid surprises in the course of the transaction process. Sell Side DD also offers a range of other ad-vantages:
  

Especially in the case of medium-sized companies, the information systems and capacities are often not tuned to meet the extensive information requirements of (possibly several) prospective buyers in a reasonable time without disrupting operations. The control of the sales process made possible by means of the Sell Side DD with regard to the time schedule and the contacts between the prospective buyers and the sales target relieves the organisa-tional resources of the company as external advisors/auditors become involved.

 

The findings obtained as part of the Sell Side DD can be discussed with the sellers and the management of the company being sold before reaching out to prospective buyers. The seller thus finds out about factors relevant to the purchase, especially to the purchase price, early on and can act on them instead of having to react to them at short notice when they are found out late as part of the Buy Side DD. This gives enough time to solve problems (e.g. adjust current financial ratios), remedy defects (e.g. obtain official permits, secure in-dustrial property rights), obtain additional information (e.g. real property value appraisals), optimise the presentation of issues and, if necessary, in the case of particularly serious problems, to postpone the further measures in the sales process (i.e. firstly, reaching out to prospective buyers).

 

The examinations carried out as part of the Sell Side DD aim to ensure that the data rele-vant to the purchase presented to the prospective buyer are complete and error-free. They also simplify the examinations to be carried out as part of subsequent Buy Side DDs be-cause prospective buyers – depending on the scope of the Sell Side DD specified in the engagement letter – are given access to confidential and extensive information in IMs and data rooms or a fact book or a vendor DD report.

Because the seller bears the costs of the Sell Side DD and this thus reduces the costs of obtaining and assessing information on the part of the buy side, the probability of the pro-spective buyers (initially) choosing to pursue the acquisition of the sales target significantly increases.

 

The Sell Side DD can be performed as Pre-Sale DD (also called “Reverse DD”) or as Vendor DD, each with varying scopes. What both have in common is the timing of their performance prior to contacting prospective buyers.

 

While the Pre-Sale DD is a kind of a test run before possible Buy Side DDs and is therefore exclusively addressed to the seller as the report’s addressee, the Vendor DD is directly ad-dressed to prospective buyers. In principle, Pre-Sale DD can cover all conceivable areas of a (buy side) DD. In practice, it is usually limited to selected, possibly issue-specific examina-tions, the results of which are reported in a short report.

 

In contrast, the Vendor DD usually focuses on the financial analysis (development of the net assets, financial position and results of operations, asset and inventory risks, fore-casts/company planning), tax analysis, if necessary, supplemented by investigations of the market and competitive environment, the IT and management information systems as well as environmental issues. The Vendor DD report is usually extensive and provides findings about a specific scope of investigated issues and the underlying information.

 

The Vendor DD offers both the general advantages of a Sell Side DD compared to a Buy Side DD and its specific advantages compared to the Pre-Sale DD most strongly in the context of bidding procedures, insofar as the seller has a large number of prospective buyers. The transaction process is significantly faster because the Vendor DD report contains a wealth of target group-oriented information. Since all prospective buyers have a similar infor-mation base, it is easier to compare their purchase price bids and expectations regarding the Sale and Purchase Agreement (SPA). At best, already in the first round of bidding, in any case before the start of exclusive negotiations, the seriously interested prospective buyers will take into account the essential risks and problems, but also opportunities associated with the sales target when submitting their purchase price bids. The subsequent Buy Side DD, if any, should not reveal any new significant findings so the scope of negotiations con-cerning the reduction in the originally submitted purchase price bid is limited. In addition, the bidder's possible expectations regarding guarantees and indemnities that are broad in scope and extensive in time are likely to be lowered and limited to specific risks. This in-creases the legal certainty of the seller.

 

The prospective buyer does not bear any risk relating to incurring any DD costs in vain until he collects information on his own. That is why prospective buyers can also initially (prelim-inary) select targets that are considered less attractive. The relationship between the seller and the auditor performing the Vendor DD can raise doubts as to the latter's independence. When an auditor is engaged, this conflict is already resolved by the fact that the independ-ence is legally anchored in the professional code of conduct. In addition, the confidence in the independence of the auditor performing the DD is increased due to the fact that the auditor offers to present the findings directly to the prospective buyer who is then offered the opportunity to ask questions.