Business Owners: Are You Prepared for an Exit?


Are you a “term taker” or a “term giver”? Proper preparation for a merger or acquisition (M&A) with sell-side due diligence can help you maximize value, drive efficiency to shorten sale time, and negotiate for the deal terms important to you, as opposed to accepting the terms the buyer is willing to offer.

Sell-side preparation

Here are a few of the questions you should start thinking about if you haven’t already.

  • What is your optimum deal structure?
  • Are you familiar with the components of an LOI and PA?
  • How can you determine the potential value of your business?
  • Do you anticipate an earnout?
  • What metrics can help you obtain better negotiation leverage?
  • Are there pro-forma and/or management adjustments that can be made to the basis of your valuation?
  • Do you believe your business deserves a premium valuation to the industry average?

Exit without sell-side due diligence preparation

Let’s first take a look at what a transaction would typically look like for a seller without proper preparation.

  • Letter of intent (LOI) primarily reflects buyer’s terms and conditions
  • The buyer works with their due diligence team, investment banker and attorneys to develop the terms of the deal
  • LOI and deal terms are generally less favorable for the business owner, with a rushed timeline as it relates to preparing networking capital adjustments, quality of earnings evaluation (e.g. non-recurring expenses, pro forma and management adjustments), earnout and other considerations

When the seller approaches an exit without the right support and due diligence preparation, the M&A process is often costly with potential for failed expectations or litigation, and there may be an extended exit cycle with efficiency loss for everyone involved.

Exit with sell-side due diligence preparation

By contrast, a business owner who takes the time to properly prepare for a deal with the help of a sell-side transaction advisory team can expect a materially different experience. During the sell-side due diligence and quality of earnings evaluation process, the transaction advisory team may assist with: financial reporting cleanup, uncovering favorable reporting and operational EBITDA adjustments, deal structuring and strategy, LOI and purchase agreement (PA) considerations and more. All of this leads to one goal: setting the seller in a much better position with ample leverage to negotiate.

During sell-side due diligence and quality of earnings preparation:

  • Seller’s accounting and finance staff works with their transaction advisory team, attorneys and investment bankers to develop a proposed LOI
  • Simultaneously, the seller’s due diligence team assists with preparing items of importance prior to information being provided to a potential buyer, while also providing supporting evidence and schedules for anticipated areas of concern
  • LOI and deal terms are on average more favorable for seller, with a more efficient process and refined considerations including: calculated purchase price adjustments, improved normalized valuation basis (“quality of earnings”), highlighted areas of focus, planned earnout, increased transparency, minimized potential risks, and an overall shortened exit cycle

As an example, it is not uncommon to see valuation premiums in excess of 10% or 20% achieved as a result of a sell-side due diligence preparation.

Drive efficiency to shorten sale time (and prevent a failed transaction)

One of the many benefits of sell-side due diligence is the ability to shorten the exit cycle and prevent a potential failed transaction. Being prepared to close a deal efficiently helps you increase credibility with investors, which ultimately results in a successful process and optimal outcome. And one of the most effective ways to speed up the exit process is to increase reporting transparency and consistency, which limits risks for the buyer and therefore increases value for both sides.

Increasing transparency does not mean putting all your cards on the table (especially not early in the process). What it does involve is getting ahead of the buyers by preparing anticipated supporting evidence and identifying where risks lie. You and your management team then have an opportunity to either correct any issues prior to going to market or begin to mitigate them in order to address them in a positive light during negotiations.

Engaging a transaction advisory team early pays off

Your transaction advisory team can work with you and your management team to proactively address any accounting or financial reporting issues prior to going to market. The earlier you engage advisors, the more they can do to help you improve performance and get ready for a transaction.

Your transaction advisory team can also help you identify value-generating EBITDA adjustments and accompanying supporting data to optimize your valuation basis shown to buyers (e.g., personal expense add-backs, erroneous accounting, non-recurring expenses such as one-time technology implementation, pro-forma acquisition or new initiative adjustments). Positive EBITDA adjustments can increase purchase price, so working with the right advisory team often pays for itself in multiples.

Don’t be a ‘term taker’

If you are planning to sell your business, you want to make sure that you fully understand all deal terms and anticipated deliverables early on. You want to be in control of the scope and structure of the deal and have the right team on your side who can help you complete the process successfully.

An M&A transaction is no different than any other negotiation – the better prepared participant gets the upper hand. With proper sell-side due diligence and quality of earnings preparation, you can approach a deal with a better hand to negotiate an outcome that aligns with your goals and terms – not just the buyer’s.

Contact me or another member of Kaufman Rossin’s transaction advisory services team to learn more about how we can help business owners plan an exit strategy, navigate the deal process, conduct sell-side due diligence and quality of earnings, and gain negotiating leverage to maximize value.

Nikoleta Angelova is a Business Consulting Services Director of Transaction Advisory at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.

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