Due Diligence – Not Just for Buyers

ARTICLE | March 20, 2024

As a business owner, you’ve likely heard the term “due diligence” thrown around, especially if you’re considering selling your business. Due diligence is a critical process that buyers use to assess the health and viability of your business. But did you know there’s a proactive step you can take to streamline the selling process and potentially boost your business’s sale price? That step is conducting your own due diligence, also known as a “Sell-Side Quality of Earnings” report.

Understanding Due Diligence

Due diligence is essentially a thorough investigation into a business’s financial health and operational performance. It’s a critical process that potential buyers go through to ensure they’re making a sound investment. A key component of this process is the Quality of Earnings (Q of E) report, a deep dive into your business’s financials.

Sell-Side Due Diligence and Q of E Report

A Q of E report can significantly enhance your business’s attractiveness to potential buyers. It entails a deep analysis of monthly trends and provides an opportunity to identify add-backs to EBITDA, which directly influences the selling price of your business. Most buyers are not incentivized to look for add-backs during their due diligence. By conducting a proactive due diligence analysis, you can uncover these add-backs yourself, potentially increasing the value of your business in the eyes of a buyer.

Moreover, a Q of E report reflects positively on you as a seller. It demonstrates transparency, efficiency, and preparedness, making your business a more attractive investment. This can lead to higher initial offers and potentially stimulate a bidding competition.

Mitigating Surprises

By conducting a sell-side QofE, you can discover any critical issues before going to market. This allows you to address these problems proactively and avoid any unpleasant surprises during the buyer’s due diligence process. This forward-thinking approach can enhance the buyer’s trust and prevent potential deal-breakers from emerging late in the game.

Q of E vs. Financial Audit

You may question the necessity of a Q of E report if your business already undergoes regular financial audits. While audits are important for compliance and showcasing good financial performance, Q of E reports go a step further. They focus not only on your business’s past results but also on its future earning potential. This is achieved by identifying non-recurring and pro-forma adjustments, providing a more comprehensive picture of your business’s value.  A Q of E also gives information on customer relationships, market drivers, trends, and working capital. The Q of E complements, rather than replaces, audited financial statements.

Conducting sell-side due diligence through a Q of E report can be a game-changer when selling your business. Not only does it provide a more complete picture of your business’s financial health and future earning potential, but it also positions your business in the best light for potential buyers. While it does require an investment of time and resources, the potential benefits in terms of a higher selling price and smoother transaction process make it well worth the effort. So when you’re ready to sell, let our Technical Accounting and Consulting Group help make sure due diligence is a priority.