Sell-Side Due Diligence

Transcription

1 Sell-Side Due Diligence: Preparing a Business Dustin Hamilton 1 Sell-Side Due Diligence 2 DHG Birmingham CPE Seminar 1

2 What is Sell-Side Due Diligence 3 What is Sell-Side Due Diligence? Sell-side due diligence challenges and assists the seller to look at their business and financial position from a critical perspective, and rationally assess the opportunities and risks facing their company. 4 DHG Birmingham CPE Seminar 2

3 What is Sell-Side Due Diligence? Performing due diligence on the front end of a sale can make the difference between a successful purchase and a derailed transaction. + Privately-held businesses, carve-outs or other entities looking to sell may greatly benefit from investing in sell-side due diligence services: Minimized surprises by identifying and addressing issues early Increased buyer confidence and seller credibility with financial information An objective analysis of the business for presentation to potential buyers Acceleration of transaction timeline Increased seller awareness of critical deal component and decision points 5 Who is a candidate for sell-side services? + Investment Banks + Strategic/Corporate + Private Equity All companies are subject to sale and could benefit from our services. 6 DHG Birmingham CPE Seminar 3

4 Understanding Different Perspectives Buyer Seller Investment Banker Growth Acquire new customers, enter new markets, obtain new capabilities Harder to build than buy Competitive response and pressures Lack of internal innovation Industry consolidation Economic considerations Diversification Team advancement Buyer is expecting Seller to clearly highlight the value of the Company Founder health/retirement Entrepreneur burn-out / strategic infidelity Shareholder liquidity Competitive necessity Capitalize on innovation Industry consolidation Economic conditions Advancement of employees Access to larger contracts, global markets and opportunities Tell the story Add-ons, carve-outs pro formas Key events Adjustments Abnormal profitability/margins Lack of adequate resources to support process Enhancement of credibility remove surprises and renegotiation risk Objectivity Nice to have versus need to have From a Seller s Perspective: The key to the process is preparation, regardless of the motivation for selling Taking all the necessary steps to prepare the company for sale Anticipating the questions and concerns of a prospective buyer 7 Sell-Side Trends + Lots of dry powder in the market a good time to be a seller + Buyer competition driving up values + Shorter exclusivity periods + Buyers more disciplined with respect to acquisition prices + Sell-side due diligence promoted by investment bankers + Private equity places value on the sell-side due diligence process 8 DHG Birmingham CPE Seminar 4

5 Understanding the Value of Sell-Side Due Diligence 9 Typical Sale Process Timeline Preparation Reaching the Decision to Sell Understanding motivations Timing and market factors Pre-Sale Planning Assembling advisory team Accumulate the right information Preparation of financial data and schedules on a basis of accounting consistent with financial statements Analyses of historical and forecast pro forma financial results Identification of tax risks and structuring opportunities Preparation of information memorandum / management presentation Identification of potential legal and financial hurdles Marketing materials and buyer due diligence Marketing Strategy Targeting qualified buyers Narrowing field of candidates Understand buyer motivations Due diligence on the buyer to ensure alignment Selection of Most Qualified Candidate Preliminary Negotiations Structuring the Deal Execution of LOI or MOU Accommodating Buyer Due Diligence Financial Tax Information technology Legal Environmental Transaction close and post-closing Preparing for Closing Preparation and negotiation of definitive legal documents Purchase price adjustments, closing schedules Meeting conditions for closing Obtaining key third-party consents CLOSING Post-Closing Issues Closing working capital, including targeted working capital levels Settlement of any post-closing obligations and covenants Monitoring post-closing compensation/earnouts 10 DHG Birmingham CPE Seminar 5

6 Sell-Side Service Offerings and Deliverables Preparation Pre-deal and exit-readiness assessment Sell-side due diligence from a buyer's view: - Presentation of historical and pro forma operating results and working capital, explanation of critical operating trends - Key deal issue identification and presentation - Identification of EBITDA addbacks with supporting documentation - Evaluation of estimates and reserves - Carve-out allocations and support - Pre-sale tax planning, tax issue identification and resolution - Tax attributes valuation, optimal post-closing tax structure - Information technology assessment - Performance improvement opportunities identification and implementation assistance Marketing Materials and Buyer Due Diligence Sell-Side Service Offerings Prepare and assemble financial information for the offering memorandum (but not referenced as DHG in marketing materials) Assist management in preparing fact-based positions to support value Bridge information historical financial data, budgets, audit, carveout analyses and offering memorandum Populate and manage the data room Prepare and coordinate responses to buyer s questions and field inquiries Assist with transaction services agreements and planning Transaction Close and Post-Closing Tax structuring and post-sale tax planning Assist with purchase price adjustments, closing schedules and post-closing issues Targeted working capital calculations and closing working capital analyses and support, including purchase agreement terms, definitions and closing schedule preparation Support and settlement of closing obligations and covenants Purchase price dispute and arbitration support 11 Sell-Side Service Offerings and Deliverables Preparation Sale and readiness diagnostics highlighting potential issues and opportunities DHG-branded or unbranded due diligence reports: - Quality of earnings, working capital analyses, tax and information technology explanations, and performance improvement analyses - Detailed financial schedules and analyses supporting the deal process Marketing Materials and Buyer Due Diligence Sell-Side Deliverables Focused analyses and schedules supporting the offering memorandum and broader sale process Assistance in compiling seller materials to facilitate the buyer's due diligence process Compiled responses to prospective buyer questions Organization of schedules and analyses supporting data room management Transaction Close and Post-Closing Closing financial schedules supporting the purchase agreement Closing and post-closing working capital schedules and support Recommendations for purchase and other ancillary agreements As-needed support 12 DHG Birmingham CPE Seminar 6

7 Due Diligence vs. Audit Due Diligence Audit NOT an attest function Attest function Analysis Verify Every dollar is material Materiality concept Scope defined by client Scope defined by professional standards Reliability of information is generally assumed Reliability of information is the purpose of an audit 13 Sell-Side Value Understand sellers motivations and adopting a buyer s perspective to maximize investment value: + Improve accuracy of financial information + Increase confidence in financials + Enhance credibility + Accelerates timeline of transaction + Minimizes buyer negotiations post-loi + Maximizes after-tax proceeds 14 DHG Birmingham CPE Seminar 7

8 Sell-Side Value Enhancers The following scenarios are examples of when sell-side due diligence is deemed to have exceptional value: + Adjusted EBITDA significantly higher than reported EBITDA + Significant operational changes (e.g., new products or services, new management team, etc.) + Multiple entities + Unaudited financials + Complex industry + Accounting team inadequate + Carve-outs + Cash-basis accounting is used + Accuracy of financial information in question + ERP/Accounting system conversion 15 Sell-Side Barriers Planning discussions with management include: + Education on process + Approaches + Examples of deliverables + Buyer due diligence process + Preparedness + Success stories + Value enhancement opportunities 16 DHG Birmingham CPE Seminar 8

9 Key Questions to Assess Seller Preparedness + Have the necessary internal resources + Identify and quantify all quality of earnings adjustments + Identify and quantify all monthly working capital adjustments + Timely monthly closing process + Ability to prepare timely, monthly and annual financial statements + Availability and suitability of key information + Provide monthly consolidating financial statements + Provide monthly pro forma financial statements if acquisitions or divestitures occurred + Carve-out financial statements + Compliant with federal, state and local tax regulations 17 Polling Question Sell-side due diligence provides value in all of the following ways, except: A. Increased confidence in financial information B. Accelerates transaction timeline C. Determines the enterprise value of the Company D. Minimizes buyer negotiations 18 DHG Birmingham CPE Seminar 9

10 Polling Question Sell-side due diligence provides value in all of the following ways, except: A. Increased confidence in financial information B. Accelerates transaction timeline C. Determines the enterprise value of the Company D. Minimizes buyer negotiations 19 Shortened Timelines For Buyers and Bankers Typical Sales Process Timeline Preparation Weeks 1 6 Marketing Materials Weeks 7 11 Transaction Close and Post-Closing Weeks Traditional Approach Information Memo Receive Offer Short List Buyer DD Final Offer Closing Sell-Side Due Diligence Approach Information Memo Sell-Side DD Room Receive Offer Short List Buyer DD Final Offer Closing 20 DHG Birmingham CPE Seminar 10

11 Financial Focus Areas Quality of Earnings + GAAP estimates and reserves + Historical pro forma financials + Support of EBITDA addbacks + Estimated allocations (carve-outs) + Properly positioned concentration + Revenue recognition LTM period financials Audit oversight Supportable projections Common Addbacks + Significant accounting reserves or estimates + Out-of-period items + System implementation costs + Workforce reduction charges 21 Financial Focus Areas Working Capital + Generally negotiated as deal nears + Must be clearly defined in purchase agreement + Compare GAAP application to past accounting practices Working Capital Considerations + Revenue recognition principles + Receivables cutoff, reserves and collectibility + Physical inventory count and costing methods + Payables, accruals, cutoff + Deferred revenue 22 DHG Birmingham CPE Seminar 11

12 Your Audit Firm as Your Sell-Side Advisor + All of our clients are subject to sale, so what can we do to assist with the process? Educate partners on sell-side services Minimize learning curve issues Enhance the efficiency of the process and reduce burden on management team Coordination on GAAP issues with audit team 23 Sell-Side Tax Issues 24 DHG Birmingham CPE Seminar 12

13 Tax Issues and Focus Areas + Tax exposure identification and resolution + Transfer tax identification and planning + Transaction tax structuring + Tax attribute valuation + Sale contract review + Payment for tax benefits 25 Acquisition Tax Issues + Step-up in tax basis + Section 338(h)(10) election + Transaction costs + Golden parachute payments + Net operating loss carryforwards + Sales and use tax exemption for sale of business assets + Franchise taxes + Structuring debt for state and local income tax + Successor liability + Indemnification 26 DHG Birmingham CPE Seminar 13

14 Sell-Side Due Diligence 27 Thank you! 28 DHG Birmingham CPE Seminar 14