Integrated sell-side diligence process
The sell-side due diligence process, typically conducted approximately six months before an exit, expands on the equity valuation health check to uncover any last-minute surprises that could delay the exit process.
Traditionally, private equity investors’ sell-side due diligence focused on financial aspects like quality of earnings and internal controls. Today, private equity firms take a more comprehensive approach, considering longer prospective buyer assessments in areas like AI, machine learning, cybersecurity, and supply chain.
As private equity firms increasingly emphasize non-financial aspects, such as IT/technology and product quality, our consolidated sell-side due diligence process becomes crucial. It must identify key quick-fix items like control gaps, underutilized ERP platforms and EBITDA improvements. Today, both private and non-private equity buyers place high importance on IT/technology and product capabilities, equivalent to financials, when evaluating opportunities.
Therefore, our holistic and integrated sell-side due diligence process must encompass financial due diligence, quality of earnings, technology, product and cyber diligence, as well as commercial and operational diligence.
By incorporating these elements into our evaluation processes, we mitigate potential exit obstacles and provide comprehensive data for our clients, enabling investors to make well-informed decisions about buying or selling.
Overview of sell-side financial due diligence and quality of earnings processes
Our unique financial due diligence and quality of earnings strategy centers around pairing internal controls and Sarbanes-Oxley Act (SOX) readiness with our ability to rapidly validate a portfolio company's historical financials and future financial projections by:
- Summarizing historical financials using Generally Accepted Accounting Principles (GAAP) reporting standards.
- Analyzing go-forward financial projections validated by commercial, operational, and IT due diligence findings.
- Assessing the reliability of existing financial processes, systems and controls, providing confidence to a prospective investor that these areas will not require a significant post-sale investment.
- Ensuring clients are SOX-ready and that there are no unforeseen issues deriving from inefficiencies in their internal controls.
HIGHSPRING EXPECTATION
Private equity firms will continue to adopt an integrated sell-side due diligence approach (including technology, commercial and operational) instead of conducting a standalone sell-side financial due diligence and quality of earnings due diligence.
Overview of sell-side technology, product, and cyber diligence
Given the increased cyber insurance underwriting risks and the increasing importance of robust technology and AI/ML infrastructure to support future deals, technology, product and cyber diligence have become necessary sell-side due diligence components. Identifying potential technology, product and cyber opportunities and risks demands a thoughtful approach involving:
- Assessing the quality and scalability of current IT and ERP systems to support long-term growth.
- Assessing a portfolio company’s overall data and analytics landscape and AI/ML maturity.
- Analyzing the current cyber posture operating model against industry peers and identifying existing best practices.
HIGHSPRING EXPECTATION
Prospective buyers will continue to focus on conducting product and data due diligence beyond the standard technology and cyber due diligence. This trend is driven by the growing significance of AI/ML and product scalability in a portfolio company's future growth potential. The commercial rise in use of AI, including advancements like OpenAI, has further heightened this focus.
Overview of sell-side commercial and operational diligence
The sell-side commercial and operational due diligence process targets crucial issues like revenue and margin leaks associated with current sales and operations planning processes. Successful completion of this due diligence requires a thoughtful, cross-functional approach, including:
- Reviewing market benchmarks, including revenue, cross-sell and gross margins against industry peers.
- Analyzing current product roadmaps to identify and close gaps.
- Evaluating the maturity of sales, marketing and operating models, as well as assessing management’s capacity to navigate future operational and revenue growth.
- Reviewing all key operational costs and processes, including selling, general and administrative expenses, supply chains and order-to-cash procedures.
HIGHSPRING EXPECTATION
Our recent experiences indicate many prospective buyers are now spending more time evaluating current and future commercial and operational prospects to assess the quality of projections in the sell-side quality of earnings report. As a result, many private equity sellers will invest in sell-side commercial and operational due diligence to anticipate potential buyer concerns.
We anticipate that an integrated sell-side execution roadmap will empower portfolio companies to seize value-creation opportunities and mitigate risks such as internal control gaps and revenue and margin leaks, all before the sell-side financial due diligence report is integrated into the investment banker's Confidential Information Memorandum. By implementing a comprehensive equity valuation process and a robust sell-side diligence strategy, a private equity firm can ensure that its portfolio company is optimally positioned for any chosen exit strategy.
