ARTICLE | October 30, 2024

Authored by RSM US LLP

For more information, please contact Thomas J. Emmerling at tjemmerling@dopkins.com.

When homeowners are considering selling their home, they may stage a room with new furniture, repaint the interior, and determine whether or not to make an improvement or repair before putting the home on the market. In the world of mergers and acquisitions (M&A), sell-side readiness is a similar process but without the paint.

Like selling a home, sell-side readiness can make a business for sale more attractive to potential buyers. More notably, it can help build confidence in the buyer and seller to close a successful deal.

Building confidence through preparation

Sophisticated buyers tend to have a keen eye for businesses that are unprepared for the rigours of a sales process. They may try to take advantage of the situation, leading to an unfavourable outcome for the seller. Sell-side readiness is a means to mitigate this risk.

In one instance with a U.S. client, RSM identified a significant sales tax nexus issue and started the remediation process just as buyer diligence kicked off. The prospective buyer proposed a $5 million purchase price adjustment (debt-like item). But, we showed that the exposure was closer to $1.5 million and negotiated a short-term escrow as our remediation efforts continued. The deal closed with no issue, and the seller was happy they were aware of the issue in advance.

Unknowing buyers are equally at risk. For instance, during the sell-side readiness process for a private equity transaction, RSM identified significant errors in the seller’s tax returns that distorted income allocations and would have cost the buyer about $25 million in tax liability on the sale. We worked with the seller and their tax advisors on a plan to remediate the issue and informed the buyer upfront, which reassured them that there would be no issues post-close.

By helping legitimize the seller, buyers gain trust in the data provided and the seller’s overall story.

Here’s how early sell-side readiness can positively affect buyer perception and confidence:

• Demonstrates professionalism—being well-prepared signals to buyers that the business is professionally managed and the seller is serious about the sale, which can increase buyers’ confidence in the transaction.
• Reduces uncertainty—through preparation, sellers can address potential concerns and questions upfront, reducing uncertainties and making the business appear less risky.
• Streamlines due diligence—when all necessary documents and data are organized and readily available, it speeds up the due diligence process, making it easier for buyers to evaluate the business.
• Enhances valuation—a well-prepared business can highlight its strengths and growth potential more effectively, potentially leading to a higher valuation.
• Builds trust—transparency and readiness build trust with potential buyers, as they feel more assured of the accuracy and reliability of the information provided.

When everything is in order, buyers are reassured that they are dealing with a serious, well-managed company. This confidence is further enhanced when the business has a robust strategic plan and operational readiness, signalling stability and long-term growth potential.

Readiness efforts, tailored to the business, are key for a successful sale

Although engaging in readiness exercises requires an initial time investment from the seller, the process often leads to a more efficient closing process and smoother transactions. When implemented properly, sell-side readiness can be seamlessly integrated into daily operations, minimizing disruption and setting the stage for a smoother due diligence process for potential buyers.

Technology and data management play an integral role in this process. By ensuring that all relevant data is well organized and easily accessible, sellers can provide potential buyers with the transparency they need to assess the business with confidence. Accurate and comprehensive data not only supports the identification of risks but also allows for a faster, more efficient due diligence process.

A thorough risk assessment as part of sell-side readiness often uncovers key issues, including:

Tax complications

Jurisdictional tax issues, aggressive tax filings and cross-border challenges like transfer pricing can all pose significant risks if not properly managed.

Financial inconsistencies

Inefficient closing processes, discrepancies in financial reporting and poor sales or profitability tracking are common concerns that must be addressed.

Operational challenges

Weak risk management, unresolved legal matters, cybersecurity vulnerabilities, vendor or customer issues, and unclear leadership structures can all signal underlying problems that may raise buyer concerns.

By maintaining organized and accessible data, sellers can quickly address any issues that may arise, thereby mitigating risks that could derail the transaction. Moreover, a solid foundation of data management ensures that all necessary compliance, legal and operational documents are in order. This readiness is essential to avoid any legal complications that may arise during the transaction. Technology aids in maintaining and organizing these documents, making them easily retrievable, securely and confidentially when needed.

This article was written by George Douvris, Jason Fennessy, Oliver Snavely, Anthony Trotta and originally appeared on 2024-10-30. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/industries/private-equity/enhancing-buyer-confidence-and-value-through-sell-side-readiness.html

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

For more information, contact

Thomas J. Emmerling PhD, CFA®, CVA®

Tom counsels clients in exit planning and mergers and acquisitions, helping them navigate the complex and often lengthy process as businesses are transitioned to new ownership.