Sell Side Due Diligence

In this episode of "Growing EBITDA," hosts Mike McSweeney and James Bandy dive into the intricacies of sell-side due diligence, a crucial process for business leaders, private equity professionals, and consulting clients. They discuss the importance of preparing a business for sale, the benefits of conducting thorough due diligence, and how it can maximize exit value. With a focus on middle-market growth, M&A, and operational efficiency, this episode provides valuable insights and practical advice for anyone involved in the transaction advisory business. Tune in to learn about the key components of sell-side diligence, common pitfalls to avoid, and how to ensure a smooth exit process.

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Highlights:

• Introduction to Sell-Side Due Diligence

• Importance of Preparing for Sale

• Key Components of Sell-Side Diligence

• Common Pitfalls and How to Avoid Them

• Ensuring a Smooth Exit Process

• Real-Life Examples and Case Studies

• Closing Thoughts and Final Tips

Episode Transcript

(00:00):
Welcome to the Growing EBITDA Podcast, where we unlock the doors to management and technology

(00:08):
insights in the middle market.
Join us as we explore innovative strategies to drive revenue and EBITDA growth, interviewing
industry leaders and technology experts.
Whether you're looking to streamline operations, understand the latest tech trends, or lead
your company towards exponential growth, you're in the right place.
Stay tuned and let's grow together.

(00:30):
So, James, we're talking about sell-side due diligence today, right?
Getting ready to sell, how to prepare to sell a business.
And sell-side diligence, for those who are less familiar in some parts of the world,
particularly in Europe, we refer to this as vendor due diligence.
In the US, actually kind of a new phenomenon about 10, 12 years ago, maybe 15 years ago

(00:52):
now, people started doing more sell-side diligence.
Don't ask me why there's a different name in the US than there is for it in Europe.
Also don't really know.
I've heard that there's some compliance reasons why it's done in Europe a lot more than it's
historically been done in Europe a lot more.
No compliance driven reasons here in the States, but certainly something that about 15 years

(01:12):
ago started to catch on and these days has become a big part of the transaction advisory
business for many firms, including TriVista.
So hopefully this will be an educational overview for folks who are less familiar with it.
It's certainly not done on every deal still to this day.
Probably never will be done on every deal across all work streams, but glad to chat

(01:34):
with our listeners about it and hopefully give them a few nuggets about what it is.
Sound good?
That sounds great to me.
So I thought to get started, what might be fun was I threw it into our friend, ChatGPT,
right?
I think I asked it, define sell-side due diligence.
So I'm going to read what Chat said.
Sell-side due diligence is the process where a company preparing for sale conducts a thorough

(01:56):
review of its financial, operational, and legal aspects to address potential risks,
ensuring a smoother transaction for buyers.
And like all things that ChatGPT gives me a response to, shockingly accurate and unbelievably
swift and helpful at the same time.
So if you want to become an expert on sell-side diligence, certainly head over to ChatGPT

(02:17):
and you'll probably learn more there than you will on our podcast, right?
Yeah.
But I will say, you know, it's interesting that I was reading this as you prepared some
show notes.
And I like to say that I think part of the conversation we're going to have today is
that technology piece.
And I found that to be interesting that it was left out of the definition for ChatGPT.
So I think our podcast listeners are going to get a little bit of an education that maybe

(02:38):
didn't tee up for them.
I think maybe your feelings are a little bit hurt that ChatGPT, a technology platform,
failed to include technology diligence.
Turned against its own.
You're a little burned by that, turning against its own?
Yeah.
Well, they're worried that it's going to take over the world, right?
That's hilarious.
That's good.
I think one of the things, Mike, I get this question a lot from kind of friends when you're

(02:59):
out and about and talking to folks like, hey, what do you do for a living?
And trying to explain what you do for a living sometimes can prove challenging.
So I think one of the things that's interesting is to put it in another set of terms, it's
like a health check for your business.
Like how am I, where am I, how am I doing?
And you know, I think that's an interesting way to kind of talk about it for the, as we
tee this up throughout the conversation, I think of this as like everything's in that

(03:22):
pursuit of a health check.
Yeah.
I think a health check in anticipation of selling a business, right?
So not necessarily a general health check.
You know, we wouldn't call those a sell-side due diligence, but a health check in anticipation
of getting ready to sell your business or bring your business to bring a business to
market.
James, the analogy that I like to give to folks who are newer to this workstream or

(03:45):
less familiar with this concept is, you know, like many things in private equity, I like
to tie it back to flipping houses, right?
Or selling homes because there's a lot of kind of parallel metaphors and analogies that
can be applied there that I think everybody understands.
And the one that I would offer here is almost every real estate agent in the world encourages
their clients to stage their home before they sell it, right?

(04:08):
And sometimes that can be a little bit of a sticky conversation because the real estate
agent has to tell the seller of the home.
You know, it's kind of like saying, hey, your furniture and your decor, the way you've
decorated this home or maintained this home is not really up to snuff, right?
So we're going to bring in some new stuff, make it a little bit fancier, maybe just tailor
a few things that's going to make it more appealing to a broader set of buyers.

(04:30):
And the reason that you're doing that, quite frankly, is you're just trying to make it
look better so that more people will come in and be impressed with it and ultimately,
hopefully pay you a higher price than you otherwise would have gotten for it or maybe
make for a smoother, quicker transaction than maybe you otherwise would have, right?
And I think that's the perfect analogy for sell-side due diligence, where it can be kind

(04:52):
of a bit of a sticky conversation, right?
Most of the time when folks are being brought in to do sell-side diligence, it's typically
going to be in conjunction with bringing in your investment banker who you've hired to
help you sell the process.
So again, they're acting kind of like the real estate agent.
And oftentimes, if they think that there is some part of the story about the business,
some part of the selling narrative that they're trying to craft and deliver to the market

(05:14):
to get people excited about buying this asset, if there's some part of it that's maybe a
little bit more complex to articulate or a little bit harder to understand, going through
sell-side diligence exercises really just helps kind of make that business look a little
bit prettier to maybe a broader set of buyers who hopefully get a little bit more competitive,
a little bit more excited.
And ultimately, because all this stuff, just like staging a house, right?

(05:35):
That costs money.
You want to make sure that you recapture those costs when the transaction goes through.
Same thing with sell-side diligence.
It does cost money to do it, but done right.
Hopefully you should be able to get some return on that investment.
So we're going to talk a lot about this today.
But I think if all people listen to is that first couple of minutes and think about it
as kind of staging a house, but put it in a context of an M&A transaction, that's a

(05:56):
great way to package it up and think about it.
So let's talk for a few minutes here about who should care about this target audience
with our podcast.
By the way, I'm pretty sure we have like 15 listeners now.
So we're moving up in the world.
Probably going to be famous here pretty soon.
But our podcast really is geared towards a couple of different types of folks, right?

(06:16):
And I'm talking about our podcast generally.
So private equity investors, CEOs of private equity-backed businesses, CEOs and direct
reports of people who maybe are leading private equity portfolio companies or who are aspiring
at some point to maybe transition from corporate America into private equity-backed, the private
equity-backed ecosystem.
And bankers certainly are going to be interested in some of this stuff.
They're probably going to be more familiar with the concepts than some of the other folks

(06:40):
who may be listening, but hopefully they'll learn something along the way.
And then last but not least, founders who may be thinking about selling their companies.
Founders oftentimes, they're just less familiar with transactions because they oftentimes
have never sold a business before.
It's the very first and oftentimes only time they're ever going to do that in their careers.
So they're a lot less familiar with things like sell-side diligence compared to those

(07:01):
of us who live in the transaction and private equity ecosystem on a daily basis.
We're doing that kind of stuff all the time, right?
But I think that's who should care about this.
Key topics we're going to cover today, we're going to do a high-level intro to sell-side
diligence, kind of explain what it is at a very basic level.
We're going to talk about how to prepare to go through a sell-side due diligence exercise,
common pitfalls.
And there are a few important ones that I'm excited to chat about and kind of how to avoid

(07:24):
those pitfalls.
And then last but certainly not least, we're doing all this kind of work to ensure a smooth
exit process, right?
So we'll talk a little bit about what that exit process looks like.
Did I miss anything, James?
James Westendorf No, I think you covered it, man.
Excited to jump in.
Adam Bilyeu Great.
So let's get started.
Section one, introduction to sell-side diligence.
James Westendorf Maybe it'd be helpful since you kind of gave

(07:47):
that intro and I really liked the overview.
Maybe I could walk you through some questions that come to mind that kind of round sell-side
diligence.
We could dive in a little bit deeper on from the intro if that works for you.
Adam Bilyeu Yeah, let's do it.
James Westendorf So I know we gave the GPT kind of summary
review of what sell-side diligence is, but maybe we could just spend a couple more seconds
and you in your own words, you can kind of tell us what is sell-side diligence?

(08:08):
Adam Bilyeu Yeah.
So for starters, it's kind of a multifaceted question, right?
Because there's different, we call them work streams, all of them optional, totally discretionary,
but there's different work streams that would pick apart kind of different components of
a business during a sale process, right?
And I think I want to reiterate just for those who are less familiar, there's two types of

(08:29):
diligence out there that surround an M&A transaction.
Buy-side due diligence, which is the investors or the company who is looking at acquiring
an entity, they're going to be hiring advisors and experts.
Maybe they have some of them in-house, maybe some third-party experts, consulting firms,

(08:50):
et cetera.
They're going to hire folks and build a team to assess a business that they're looking
at buying, right?
Hence the buy-side, the buy-side of the transaction, the buy-side due diligence work streams could
include legal, operational, compliance, technology, accounting, financial, you know, could be any
number of different components of that.

(09:11):
We call those work streams.
On the sell-side, that's where you've got the company who's positioning itself to be
sold.
They're just conducting what is honestly not dissimilar work from what the buy-side diligence
folks are going to be doing, but they're conducting it on themselves, right?
So it's really that self-assessment.
It's kind of that inward look, if you will.

(09:33):
And by hiring third-party advisors, right, sell-side due diligence is not something that
you can do really in-house, right?
I mean, you can obviously get your own house in order, back to the staging commentary.
You can sweep up the floors a little bit if they're dirty.
You can hire a new head of sales if that's some initiative that's important for the business,
just as one random example, maybe buy a couple of new pieces of equipment in anticipation
of making yourself more attractive to potential buyers.

(09:55):
Certainly you can do that stuff in-house.
But when we talk about sell-side diligence, we're almost always talking about third-party
advisors that you're bringing in to help get that company ready for sale.
And I think a common misconception for those that are less familiar, a lot of people are
going to be like, well, wait, isn't that my investment banker?
Not surprised that people might think that.
Absolutely, you're going to be bringing in your investment banker to help sell your business.

(10:17):
But the investment banker's job is really one of kind of an intermediary.
In fact, in our industry, we call them oftentimes intermediaries.
And they're responsible for, you know, they have expertise in going through an M&A process.
They have databases of prospective buyers.
Oftentimes these folks will be very industry-focused.
For example, you'll have aerospace and defense specialist investment bankers.

(10:39):
You'll have industrial specialists.
You may even have industrial distribution specialists or consumer or food and beverage
specialists, whatever the case may be.
Oftentimes that's how they structure those firms.
They're going to be coming in to really kind of help walk you through the process and hold
your hand from kind of soup to nuts.
So what they do is they're going to help put together a data room of all the important

(11:01):
information they're going to help put together.
What's called a SIEM or a confidential information memorandum, which basically articulates what
the business is, what its strategies look like, how it's going to grow and why it's
attractive to potential investors or buyers of that business.
And then they're going to do the outreach, manage all the meetings, help with negotiation
of key aspects of diligence and also help with negotiation of key aspects of the purchase

(11:23):
agreement and ultimately kind of hold that business's hand all the way to the transaction
close and they get paid to do that.
What they tend not to do though is even if they have industry and sector expertise, maybe
it's industrial distribution, that's the specialty of that particular investment banking team.
They're not operators.
For starters, they're also not accountants.
They're not lawyers.

(11:44):
They're not compliance experts.
They don't have any environmental engineers on staff that can go and assess to make sure
that the soil at the facility sites are that nothing bad has been done there.
Things are leaching into the soil that shouldn't be.
So what they might encourage their client to do, their client being the business that
wants to sell itself, is to bring in some outside experts.
Before we sell the business, to help craft the narrative and to potentially produce some

(12:09):
reports that could be included in the data room in the future and shared with prospective
buyers that help reinforce their value proposition when selling the business.
For example, you might have an industrial manufacturing business that's been built up
over acquisition over a number of years.
Maybe it started at 100 million in revenue.

(12:29):
Now it's a $500 million revenue business a few years later.
How did they get there?
They bought a bunch of their competitors and they did a roll up.
Well, maybe they still had six or seven manufacturing facilities, but the next phase of growth was
consolidating that down to three manufacturing facilities, center of excellences, if you
will.
And in order to do that, there's obviously going to be costs on the relocation and consolidation

(12:52):
and closure of some facilities, maybe the erection of a new facility.
There's going to be costs associated with moving production and maybe making some staff
redundant but hiring some new staff.
But there may be a strong value proposition around why they would do this.
Ultimately, there's some net savings to be had.
Just as one example, you might want to bring in, in that sale process, some experts who
have credibility in that space to say, hey, yes, we actually believe and here's all the

(13:17):
detailed analysis that we've done that if you did that, your profitability would improve.
Maybe you would go from a $50 million EBITDA business to a $20 million EBITDA business through
those consolidation and cost reduction activities.
In a sell-side diligence exercise, that would be an example of an operations-focused sell-side
diligence exercise.
That third-party advisor might be able to come in and craft a very nice document that

(13:38):
you could share with prospective buyers that would go, hey, listen, I know this is an X
million EBITDA business today, but if you go and you make a couple more investments
and give it a little bit of time, we think that this business without any top line revenue
growth is actually going to operate more like X plus some number.
So you should be even more attracted to buy this business that's really more profitable
than necessarily meets the eye today.

(14:01):
That's an example of an operations diligence workstream.
There could be other examples.
On almost every transaction these days, people are doing accounting and financial diligence,
typically referred to as quality of earnings analysis or Q of E. That's being done on almost
every sell-side transaction these days.
What I just described is a little bit more operationally focused and we see that in some
transactions where maybe there's a little bit more of a complex story to articulate,

(14:21):
but an example nonetheless of what you might want to do.
If you were a food and beverage manufacturing business, maybe you would want to do a food
safety diligence exercise pre-closed just to make sure that people weren't going to
find any surprises.
It's oftentimes likely that on the buy side, when you go to sell the business, even if
you've done the sell-side diligence, oftentimes those folks are going to want to come in and
do their own diligence as well.

(14:42):
But what you can position this as is, hey, look, here are the skeletons in the closet
and don't take that always as a negative context, but here's the realities of this business
as attested to by a third party because you want to educate the buyers.
The buyers, at the end of the day, most buyers of businesses know that they're never buying
a perfect asset because there's no such thing in the world as a perfect business and buyers

(15:04):
are comfortable with that.
What scares the pants off of them though is they don't want to find out things after they've
bought a business.
Disclosures are obviously a very important part of an M&A transaction, but beyond disclosures,
like legal disclosures, making sure people can understand and appreciate the value of
what they're buying and also make their diligence exercise a little bit easier on the buy side

(15:27):
typically has some positive outcomes for folks.
So hopefully that's a little bit more clarity, James.
I think I probably got a little long-winded there, but some additional thoughts on what
is sell-side due diligence.
James Westenberg I appreciate it.
I think it's good to have that definition because a lot of times, again, when I talk
to folks and I say I work in diligence sometimes, the thought is always that buy side, right?

(15:48):
Assuring that you're buying something that you expect to buy some of the parts that you
mentioned around the quality of earnings is always brought up because a lot of financial
folks understand that.
But I feel like there's a lot of misconceptions and lack of understanding on the buy side
of it.
And I think one of the things that, you know, the name of the podcast is Growing EBITDA.
And I think one of the main things about a sell-side diligence, it doesn't really grow

(16:12):
your EBITDA, but it allows that maximization, if that's a word, I'm going to make up a word,
but it allows you to maximize the exit value, right?
So maybe you could talk a little bit about how you've seen or the understanding of why
a sell-side could help you maximize that exit value.
Adam Bolling I think I want to take issue with one thing that you just said though,
slightly different opinion that I have, where you said it can't really grow EBITDA.

(16:35):
I actually think that it can.
And my argument would be another common misconception about sell-side diligence is the timing of
when you want to go and do something like this.
Some work streams make a lot of sense to start two months before you go to sell the business.
The quality of earnings analysis that I just mentioned would be a great example of this,
where you can't do that eight months in advance, seven months in advance, 12 months in advance,

(16:57):
because it's going to be outdated when you go to sell the business.
So you really kind of got to start doing that like right before you go to sell the business
because you want fresh data, fresh numbers.
Otherwise, you'd be paying them to refresh that every month as the transaction got closer.
With some work streams, particularly around the operations, a sell-side operations due
diligence, we actually encourage people to do that a little bit further out from the
sale than I think meets the eye for most folks.

(17:20):
We typically are encouraging folks eight to 12 months before you want to sell an asset,
you should be doing some of the more operationally focused work.
And that's where I think you have an opportunity to actually improve EBITDA.
For example, you may have some operations experts walk through your production facility
and they come out and they go, hey, listen, you guys have built a great business.

(17:41):
But typically, we see people in this sector of this size and scale generating 18% EBITDA
margins.
You guys are only generating 16% EBITDA margins.
And through our quick assessment, we actually think you have a labor productivity issue
on your factory floor.
And if we did a focused two or three month improvement project, we might be able to reduce

(18:03):
the amount of labor that you need to build your widgets and actually improve the profitability
of the business.
Now, we may find some other things that are a little bit more long range in nature like,
hey, at some point in the future, you may want to think about consolidating sites or
you may want to go through a route optimization exercise.
Maybe if you're in the logistics business, more of a distributor in that example.

(18:24):
So there could be some quick wins, which may in fact result in some actual hard dollar
EBITDA savings before you exit, which by the way, I think most people are listening to
this podcast, this podcast about growing EBITDA.
That's very important because you're going to get paid some multiple of that some short
period of time down the road.
You might not actually get paid for the future potential EBITDA, although I'll give some

(18:45):
examples of where you can actually get paid for some of that too.
So I just want to take quick issue there that I do think it's something that can impact
EBITDA in the very near term, but that's not always necessarily the case.
So back to your question, James, about how does this create value at exit?
So it's actually been our experience that you can drive some pretty significant value.

(19:05):
And the reason that that is, is I mentioned in my example a few moments ago, the example
where you had a business that had been built up over time, mainly through acquisition,
and there was a big and kind of known opportunity to consolidate some of those sites and reduce
a lot of costs in the business and in turn drive EBITDA up.
Somebody might not pay you a hundred cents on the dollar for the future value, but you

(19:28):
may be able to get them to pay you 20, 30, 40, 50 cents on the dollar.
Because if they're looking at that business and going, hey, this really isn't a $50 million
EBITDA business.
This is really a $70 million EBITDA business.
Somebody's just got to go do all that heavy lifting.
And yes, there's some risk involved.
So I'm not going to treat it like it is a $70 million EBITDA business today.
But if the plan is known and it's sound and it's been attested to by maybe a third party

(19:52):
with credibility and doing that kind of implementation work, you oftentimes can get people to pay
you for some of that.
And if you can get paid for $10 million of that at a 10 times multiple, I mean, you could
be talking about $100 million of enterprise value.
Now the difference would be on the flip side of that coin rather, if you just went to sell
your business as a $50 million EBITDA business and you said, hey, we got all this opportunity

(20:14):
out there to save costs by consolidating some sites, I think the buyer universe, many of
them will have the ability to tease that out and kind of test and pressure test that during
their buy side diligence.
But why make it hard for folks?
If there really is a huge lever that can be pulled, you should try as the seller to get
paid for some of that.

(20:34):
Don't let the buyers find it and think that that's their upside.
Bait the hook for them, set the table, send them the menu of options.
And what you can create there is a situation where you're not relying on some small subset
of buyers who do have the expertise to be able to tease that out during diligence on
their own.

(20:55):
You're actually broadening your buyer universe because there are some folks who might not
think like that.
If you have the ability to lead them to water through a sell side diligence exercise, you
should certainly do that.
The whole thought process around this, whether it's operations sell side diligence or financial
through the Q of E or compliance or whatever the case, technology, whatever the case may
be, really that you're doing this because you're trying to set the table to make yourself

(21:18):
look more attractive to a broader set of buyers who think you're a really great business.
If you can do that and get that material in the hands of the right buyers, the theory
is and we've seen this play out time and time again, is that you're going to make it easier
for them to do their initial assessments.
Getting from, oh, that's an interesting business to we're interested in that business from

(21:39):
a buyer perspective is easier, faster, better.
Their ability to go from, hey, I'm interested in this business to, hey, I really understand
the value proposition here and I want to pay you for this business and acquire this business.
You tend to be able to keep more people into the process longer and the deeper that you
go with more parties, it keeps the exercise more competitive.

(22:02):
Just ask any investment banker if you're better off having one or two buyers chasing your
asset versus six or seven.
Supply and demand kicks in and obviously the more demand that you have from a broader buyer
universe, the higher likelihood you're going to have that you close the deal and the higher
likelihood that you have that it's going to be a bigger number than it otherwise would
have been.
The whole thing is driven by this idea of setting the table for buyers, making it easier

(22:26):
for them to understand where the business is going, make it easier for them to understand
where the opportunities to create additional value lie.
In doing so, you can keep more of the buyers at the table longer because they have reduced
risk themselves.
They don't have to spend as much money on diligence so they can go deeper into a process
without getting burned on fees themselves.

(22:46):
They can understand the business better and ultimately, hopefully it creates more competitiveness
on that deal which in turn often results in not just higher terminal value or enterprise
value or purchase price for the sellers because you have a more competitive process but hopefully
also you've been able to unlock some potential EBITDA upside and you're getting folks to
pay you for some value that they're ultimately going to have to take the risk of creating

(23:07):
longer term.
That makes sense.
When we think about the sell side and we've talked a little bit about what it is and why
folks do it.
I think we've talked about now kind of the value side and I know you've touched on it
a little bit but just because we're going to go in a little more detail in the next
section maybe it's good to talk about because you talked about the quality of earnings can't

(23:29):
be done too early because you're kind of tripping over yourself as the new financials come out.
Maybe just for the group, the key components that are part of a sell side diligence and
then we can maybe dive into a couple of them in our next topic.
Yeah, absolutely, so we've talked about quality of earnings, financial and accounting, sell
side diligence.
We've talked a little bit about operational sell side diligence.

(23:51):
That could include things in the broader supply chain too.
An example of that might be let's say you've got a $200 million revenue business that imports
a lot of product from China.
By bringing somebody in from the outside and asking some intelligent questions about the
business maybe you uncover that, hey, you only have one supplier for the raw materials
that make up 50% of your sales and maybe it's a supplier that's in some faraway land, China,

(24:14):
Indonesia, Vietnam, wherever the case may be.
Again, doing that early gives you some time to start thinking about maybe we should second
source this, right?
Like take off the table concern that buyers are going to have that you have supplier concentration
risk by starting to demonstrate that you're building out that capabilities.
When I talk about operational diligence, a lot of the examples that I used were kind
of four walls, manufacturing, production oriented.
It extends well throughout the supply chain.

(24:37):
If you're dealing with businesses that have widgets, you might be dealing in more of a
business services environment where you may be thinking more about human capital management
opportunities or a lot of technology opportunities, making sure you got the right system to drive
efficiency across your sales force or your labor force, whatever the case may be.
There's those kinds of operations and supply chain, value chain oriented work streams.

(25:01):
Then you get into some niche work streams, right?
Compliance.
You can do a food example by doing food safety due diligence or HR due diligence, right?
Making sure that maybe you've had some OSHA violations, making sure that you've got the
proper protocols in place to prevent that from happening in the future and making sure
you've tied off with legal that any outstanding legal situations that the business may have

(25:23):
had under your ownership have been run to ground.
Really just kind of thinking about each functional area in the business from all the back office
functions.
Even this again, it's not all these functional areas on every deal.
It's really about where are some risks and where are some real opportunities to drive
value and making sure that you're focusing on those.
Almost every deal, you're going to have that quality of earnings analysis because everybody

(25:45):
needs to understand how much profit the business generates, how much EBITDA the business generates,
how predictable are the cash flows, how the historical performance has been trending.
That's done on almost every deal.
Almost every other diligence, sell-side diligence work stream that is, is totally discretionary,
to conclude, Ops, supply chain, technology, cybersecurity, food safety, human capital
management, talent management, those sorts of focus areas.

(26:08):
There's different firms out there, obviously, as you know, James, there's different firms
out there that specialize in all of those.
There really is almost no one out there who does all of those.
It'd be very difficult to be an expert in all of those things, which is why you see
this deep, broad pool of service providers who serve this space.
Mike, another topic for another day maybe is where that alignment of those services
is most beneficial.

(26:29):
For example, in our space, we know that when folks go in to do an operations diligence,
having the technology diligence aligned to the operations really allows you to show that
business enablement.
So that's a future episode for folks where we talk about why certain services align well
and how that can drive value.
So I know that I'm recently coming off of a sell-side diligence and did one with a client

(26:52):
recently.
Maybe we can get a bit tactical.
What questions do you have for me kind of at the tactical level?
Yeah.
So it might help some folks to understand, you know, how do you prepare for going through
one of these exercises?
Yeah.
So if anybody's ever been on a buy-side diligence, we all know that there's a lot of documentation,
there's a lot of pressure, and there's a tighter timeline.
I think it's the same type of things, but with a little bit more of a relaxed timeline.

(27:15):
But there's a lot of important pieces to have.
Mike, you touched on it earlier, and it's a great comment.
Having your financials in an organized manner that folks can be able to understand them
and clearly understand what they are.
And a lot of times we go into folks of just making sure you have good, clean data on your
financials that allow those outside parties to understand where you are on your journey.

(27:36):
Another piece that I think as a former person that worked in corporate that sometimes we
have a challenge with is really good documentation, trying to gather that documentation.
What you're trying to do is capture what we like to call artifacts or pieces of information
that allows a third party to quickly ingest and understand what you do in your business.
So gathering all that documentation, whether it be training guides, whether it be communication,

(27:59):
whether it be just kind of some things you've captured along the way, helping paint the
picture of what you have.
And the last piece, hopefully you have this, is around your compliance documentation.
Where you on your journey have there, you mentioned OSHA earlier, is there any OSHA
compliance issues?
Do you know that you have gaps and kind of putting that together?
One of the ways that folks connect and are able to share that information, because you're

(28:21):
not going to have the outside groups come into your systems and servers, is creating
what's called a virtual data room, or just really a place in a repository where you can
store files and share them securely with an outside party.
To the point that you made around bankers, if there's a banker in the process, they're
very familiar with the VDR and standing that up.
If you're doing this directly, the firm that you reach out with that does this should be

(28:43):
able to help you set that up.
But it's really kind of a place where you can work with your team and say, as we gather
these components, these artifacts, these elements, let's put them in this central place that
we can then share with the outside party.
And sometimes the outside party will drive a bit of what they're looking for, but really
your team has the ability to start to load those files in a safe and easy way.

(29:04):
And then the part of that, and the reason you're doing that, is you really want to build
that narrative.
Now, I'll tell you, there's some bias around there.
A lot of times businesses really want to focus on a certain outcome from the sell side.
You mentioned it, Mike, hey, we know we have some operational improvements we want to do
and we drive towards that narrative.
And so they start to land some of those artifacts that really align to the narrative they have

(29:25):
in mind.
Hopefully, if you're working with a good quality provider, they'll start to request things
that either you A, don't have, or B, don't speak to the narrative you're trying to talk
about because this is the time to have those honest conversations when you're going through
the sell side process, be open and honest about those challenges because it stays, for
lack of a better term, in the family as part of that transaction.

(29:48):
And so you can have those conversations.
Those aren't going to be shared as part of the SIM that you mentioned earlier.
They're not going to be shared with the outside groups.
Those stay with that group.
And again, as long as you're working with a quality provider.
You know, as you're talking through that, James, I realized one of the things that I
didn't touch on in my intro and that isn't really kind of covered in this next section

(30:08):
we're now in talking about preparing for sell side diligence, just kind of like as you're
doing it.
But I think it's related enough.
What jumped into my mind was there's one thing we talk a lot about too with sell side diligence
and that's charm school.
And especially if you've got a management team who has never gone through a process
before.
And especially if you've got a management team and you know, I'm a big believer in this

(30:31):
who has equity in the business, right?
Who is going to be aware that a process is taking place that we are selling the business.
People generally in businesses are nervous when kind of unknown outsiders come in and
ask a lot of questions.
Some of them intelligent.
Let's just say all of them are intelligent because nobody would ever ask an unintelligent

(30:51):
question in an M&A process, right?
But people just get a little bit skittish, a little bit nervous when these sorts of things
happen.
That's just in general.
When people know it's part of an M&A process, they get even more nervous.
And then the next level there is people who have oftentimes the case, the first time they're
ever going to have a significant monetization event, right?

(31:15):
Maybe you've got a COO who owns 1% or 2% or 5% of the business, maybe the first time they've
ever going to get a big bite at the apple from a wealth generation and creation perspective.
You can kind of see the picture that I'm painting, James, that you could have some folks who
are obviously very proud of what they've built, but can be very nervous in those settings,
right?

(31:35):
And the last thing that you want as the seller of the business is for the first time ever
in that executive's career, let's take that COO as the example, some people coming in
and asking a bunch of really good questions that he or she doesn't have a really good
answer for.
And listen, I'm not talking about encouraging people to hide things, right?
You'll never hear us be proponents of, hey, if you know something's wrong, you shouldn't

(31:56):
disclose it.
We don't, maybe try and fix it, right, this kind of our mentality.
But if you've got a less experienced from an M&A perspective executive or group of executives,
making sure that you're coaching them up on what this process is going to look like, making
sure it's not the first time that they've ever heard questions like, tell me about the
detailed analysis that you did around your consolidation strategy, right?

(32:19):
You want to make sure that the answer isn't, well, we think there's a 20% cost savings
by doing X or Y.
You want it to be, we came up with the idea to do this because of X and Y and Z input
factors.
We did A and B and C analysis.
By the way, would you like to see the output of that and our logic around why we think
that this next phase of the business's maturity or by going and doing whatever it is that

(32:42):
they're going to go try and do is a good idea.
I mean, that is just so much of a better response from an executive, from the seller's perspective.
It's also a much better response from the buyer's perspective, right?
And the buyer is going to sit there and be like, geez, we tour a lot of businesses every
year.
Very few are able to articulate it as professionally as that person did, right?
So there's an element here of charm school too.
We call it charm school internally.
Different groups needed a little bit more than others, but that oftentimes is kind of

(33:05):
one of the unspoken benefits of doing a process like this too.
So food for thought.
Can I add on to your unspoken benefit real quick?
If you have underperformers in your organization, they stick out like sore thumbs and a sell
side diligence because they can't answer those questions and then's the time to make the
change so you can have someone in who's enough ingrained in the business.

(33:25):
And I think maybe it's interesting to maybe talk about for a second.
You mentioned earlier, I just want to mention it again.
The time to start preparing could be a year before you're thinking about that transaction.
Use that time to potentially swap out some of those resources or get in the resources
that are better aligned to what you're driving towards as your business.
Because I can tell you, sitting across from multiple people that have all gone to charm

(33:46):
school, they're very charming, but there's not a lot of value or actuality in what they're
saying.
And so ensuring that there's alignment of the management team and your communication,
but then also making sure you have quality individuals who can drive that message and
to your point, might articulate the value that's been there.
Because we all know we do great things.
Sometimes we're poor in communicating them.
And I think we've seen that time and time again.

(34:08):
So I would encourage folks six to 12 months before you're ready to think about that transaction,
start to get your folks involved, start to let them know, and then get a third party
to come in to help you kind of double check some of that.
And you may learn a lot about your internal talent on the journey as well.
Yeah.
So we've covered a lot of ground, James, but maybe last on this topic of preparation, how

(34:29):
can companies address potential risks?
Yeah.
I think with a sell side, the major risk is lack of transparency, maybe a little bit too
much of putting your thumb on the scale with some things, and then a lack of preparedness.
I think one of the things that is important to discuss is knowing that there's a large
time commitment that goes into sell side diligence.

(34:52):
Being honest, there's a lot of time that goes into it and it is a lot of work.
I know we're selling it as a great opportunity and I think it's something very important
that organizations should do.
Not properly allocating time for that process can have great effects on your organization,
A, because it's a time suck and B, because it doesn't produce a result that's valuable
to folks.

(35:13):
And I think another risk going into this is assuming a sell side diligence is going to
fix everything.
I think you mentioned earlier, Mike, and I respect the comment around that it can affect
EBITDA, but there's also this idea that I go through to a sell side diligence and all
is going to be right in the world.
There's some work that has to be done at the end of a sell side diligence to be able to
drive that value.

(35:34):
And so you also not only need to allocate time to do the process, you need to allocate
a little bit time coming out of the process for those quick wins and easy fixes.
And I think we talked to a lot of folks that think coming in, and you know, we hear the
phrase all the time, put the lipstick on the pig is going to make it all better.
That's a lot of times not true.
And so I think maybe in our next section, we could talk a little bit about how we mitigate

(35:55):
some of those risks.
Yeah, absolutely.
You know, I think if you go back to my analogy from the beginning about house staging, right,
the reality is, is that again, I think most good realtors, real estate agents would tell
you don't call me the month you want to sell your house, right?
Tell me six to eight months before you're thinking about selling and let's have a conversation

(36:16):
about it because maybe I would have encouraged you to paint your house white because nobody
buys baby blue houses anymore.
Or maybe let's improve the landscaping, maybe do a little bit of touch up painting because
some of those things can go a really long way.
If you can get an extra 5% for the home and it's a million dollar house, you're talking
about 50, $60,000 when maybe spending five or 6,000 over the next couple months to kind

(36:38):
of, no pun intended, get your house in order could be a really good plan, right?
But you can't expect the realtor to walk through on the first of the month when you're trying
to sell by the end of the month.
The realtor says, hey, I think you should repaint that fence because it's, you know,
10 years past due.
The chances that you're going to be able to find a painter, get a painter, get on their
schedule, have them do a good job the first time before you can sell it, get it listed

(37:02):
and have that transaction close in a 30 day period, it's just not going to happen.
In an ideal world, you know, calling some folks well in advance of when you want the
transaction to occur, it just gives everybody a little bit more time to prep and be more
thoughtful and be more ready, more time for charm school where that's needed.
Yeah, great point.
Can I make a personal tie to this one, Mike, which is interesting.
So recently moved, I'm part of that move, my wife's mom is a realtor.

(37:24):
And so we obviously engaged her ahead of time, to your point, and prepared for that.
And so we asked her for some tips of like, hey, my wife's on maternity leave for six
months, we need to move within this window, so we need to sell a home, buy a home, move
with a three month old, all in this short window.
And you know what's interesting?
She said, hire a home inspector, tell them that you're selling the house, that you've

(37:45):
sold the house and have them do the inspection as if the house has been sold.
Wasn't on the market, hadn't done anything, hired a home inspector.
And what we did is we used that as a punch list, remediated everything from that home
inspection.
And coming out of our second home inspection, which was that transaction, we had zero items
on the punch list.
Now, some of them were probably more detailed and a little more granular than we needed
to do.

(38:06):
But we definitely had that assurity and comfort.
And so it really made me think about the office and work at that point.
And I found it interesting that that was the one tip she gave us for a quick transaction.
Tim Cynova Absolutely.
Yeah, and try and hire the most thorough home inspector.
Yeah, you want to throw a commercial in here.
But but yeah, you know, you want to hire the most thorough home inspector you can find,

(38:26):
right?
You want the guy that every real estate agent in town is hoping you don't hire when you're
trying to buy a house from them.
That's the guy that you want.
And by the way, that's the guy you want on the sell side.
And that's the guy you want on the buy side.
You want to work on both sides of it for you.
So but yeah, great, great example.
Great example.
Trey Lockerbie So maybe we can talk a little bit about some
of the pitfalls and and how folks kind of are able to avoid them because we talked about
the risk.

(38:47):
So let's just pull that through to this talk about some things that we've seen in the field
maybe.
What kind of questions you think our users would be interested?
Tim Cynova Yeah, I got some questions for you.
What what are the common mistakes that you see during sell side oldest?
Trey Lockerbie So there's there's so many that that are challenging.
I'm going to go from an operations and a technology perspective, maybe to kind of separate a little
bit in this section to talk about some of those mistakes.

(39:10):
So one of the biggest mistakes is the documentation is outdated and not the most recent information.
To walk you through the process again, I start to engage this outside group and the information
comes in, then I start to review that information.
If I'm the external party, and I'm looking at old documentation, you can imagine that
I'm now spun up on some story that isn't really in existence.

(39:34):
One of the common mistakes is sharing old information or not reviewing the documentation
that that's sent over.
Another common mistake we see a lot of times is I'm hoping that all these businesses have
a management meeting where the senior leaders get together.
But communication on the management team is super important for two reasons.
Reason number one, there are going to be folks at the business who are unaware that this

(39:56):
is happening and that a transaction is going to happen.
So they've not been informed of this change.
And you need to inform your management team that this is happening so folks can be prepared.
But there are folks that you don't want to alert that you're going through a transaction.
So that clarity of communication is super important.

(40:17):
Another one is when you start to look at your sell side diligence and start to work through
the pieces and components of it, it loses steam.
Because at the beginning, everyone's on board, then you kind of get in this monotonous, I
got to go through information and iterate.
Someone internally has to be the internal champion to drive that process forward, to

(40:39):
ensure it continues with the same energy that you had at the beginning.
And also helps protect you of the information you don't want getting to the rest of the
team getting to the team.
I think internal ownership, executive communication and alignment is a really common mistake that
we see a lot.
So how do you think about, there's a lot of conversation when we do these work streams

(41:01):
around what number is going to be the number that we put in to the materials, right?
To the final report, bearing in mind that you're going to share these final reports
oftentimes with your buyer, your prospective buyer group.
And by numbers, I mean, what is the adjusted EBITDA number that we're going to go with,
with the Q of E financial due diligence team members?

(41:22):
If it's operations diligence, what is the savings number that we're going to use, right?
If it's maybe commercial sell side diligence, which I'm realizing now, we haven't talked
at all about commercial sell side diligence today.
For our listeners, that would include what's the market size for these products?
How fast is the market growing?
What are the tailwinds?
What are the headwinds?
Right?
There's a whole work stream around that.
And in the case of that, what is the market growth rate that we're going to align on?

(41:45):
The experts that you're bringing in from the outside, they're going to do a bunch of work.
They're going to give you a recommendation, but this is a collaborative back and forth
process.
So it's a little bit of a dialogue at the end of the day around, well, we believe those
numbers, but maybe the conversation is that those numbers are a little bit more frothy
or maybe we should be a little more conservative, whatever the case may be.
How do you think about alignment on some of the value opportunities that are being uncovered

(42:08):
through the process and how you're quantifying those?
And how that might impact the sale process?
I think it's interesting when you, when the output, let's, we start with the output, right?
You talked about that SIM.
So when I receive that SIM, I'm going to start to review that, make very basic assumptions
of the business based on what you provide to me.
Number one, if you're overestimating in the sense that you're overestimating in future

(42:30):
projections within the SIM, and then I engage you and start to push on those and they fall
apart, it's not a good look and it's a tough interaction at the beginning because we're
already kind of starting in a tough place.
But I think the other side of it is if folks are expecting to see something come out of
a sell-side diligence and they're not able to achieve the numbers they're looking for
because the numbers just don't add up, I have to be comfortable with the answer of no and

(42:54):
adjusting my internal feelings and those estimates to align with market realities.
And so I think one is, is a gut check on yourself to know, hey, I got to be honest.
And the second is, you know, it's coming because the outside parties are going to go and review
these things.
So you might as well take the pain upfront and not have it be part of the deal process
and build mistrust.
Trey Lockerbie So when you think about other risks, right?

(43:16):
This is we're talking about common pitfalls, how to avoid them here, right?
When you think about other risks, what other operational risks are oftentimes overlooked
in this process?
Dr. Justin Marchegiani Yeah, I think we have a tendency to look at
the basics, right?
And some of the things that aren't looked at is some of the supply chain components,
right?
So we went in and did a sell-side diligence on indirect procurement, which is interesting

(43:37):
because you think you would do a diligence on direct procurement, but this group had
a lot of consumables and wanted to have the indirect.
And they're both sides of the same coin.
And so I think sometimes folks get hyper focused on one of the things they want to look at
because they sit with the management team and say, what are our issues?
They bubble up an issue and then they assume that's what you need to have in sell side.
So I think some of the operational risks are not looking at all your operations.

(44:00):
And then the other side is the value stream mapping.
When you go do that value stream mapping, not looking at all your value streams and
how they interact with each other and really teasing those out sometimes can leave some
glaring misses that if not asked about aren't found.
Now I think there's some ways to solve that.
Having your team that's doing the sell side diligence come on site, interact directly

(44:20):
with your team and have those conversations.
But I'll go back to an earlier point.
If I'm only engaging a small group of folks and oftentimes senior leaders within the organization,
senior leaders don't know all the issues that happen on their team, especially in higher
and mid size organizations, they struggle to know some of those challenges.
So you could not be engaging the right folks at the right level due to some of the secrecy

(44:42):
honestly that's needed part of the transaction.
So I think really having your team bubble up those issues, engage the lower level teams
that may not be in a have direct contact as part of the sell side diligence, but to at
least petition those teams to capture those challenges is a way to have a mechanism to
bring that to a larger group because you're not going to be able to go on the floor sometimes
and have those direct conversations.

(45:04):
So what happens James, if you bring in an outside advisor, they go through your business
and they come back and they say, hey, you got a decent business, but there's a skeleton
over there or hey, we toured your six sites.
What's going on with number six over there?
Like, why does that one look at smell a lot different from the other ones?

(45:27):
You know, and I think a lot of people are, listen, every no business is perfect, right?
This is kind of one of the mottos that we have around here.
We've never seen a perfect business.
It likely doesn't exist.
So I think a lot of people worry about, hey, somebody is going to come in and they're going
to find out some of our less attractive features.
And you know, the service providers, you know, anyone worth anything will tell you at the

(45:49):
onset that, hey, listen, we'll write this report and we believe it to be a collaborative
exercise.
We want to have your input.
But at the end of the day, if we're going to put our brand on it, for example, if TriVista,
if your team, James, you know, on the technology side says, hey, we did IT, a sell site, IT
due diligence, and here's what we found, you can't, you might be able to add like a little
dusting of powdered sugar, but you can't totally advertise the business as something that it's

(46:12):
not, right?
If they've under invested in cybersecurity, you can't come out and say, oh, they got the
best cybersecurity protocols in the world.
Because quite frankly, your brand in the marketplace would be, your credibility would be lost quite
quickly and that's not what anybody's trying to achieve or none of the service providers
would take on these work streams in the first place.
Their revenue is not attractive enough to take on that level of risk.
So what happens or maybe phrase differently, why is that level of transparency important?

(46:38):
And I think as a headline, people should definitely prepare themselves that you bring in a bunch
of outside, quote unquote, experts, whether or not they're actually experts is for the
client to decide, I guess, ultimately, but you're bringing in a bunch of experienced
folks to come and pick apart your business.
What happens when they find out that there are some issues, some red flags or some yellow
flags?
What do you do?
And why is this so important to allow this?

(46:58):
Why would you encourage people to be comfortable with this as an outcome?
You know, recently I was traveling and sitting in the lounge and randomly Scandal, the show
was was on the TV and running and it was, I forgot about the format of Scandal.
It was happy niceness at the front, then a problem, then a discovery, and then later
the client or they were trying to fix for wasn't completely transparent and they had

(47:21):
to like scramble to solve problem number two, right?
And I think it's interesting.
It's a bit like that kind of multi-level.
If you're not honest, your sell side diligence team are the fixers.
They're there to help you and support you and bring that along.
If you don't tell them where the issue are, those skeletons or even micro skeletons are
at that need to be solved.
It's hard for them to help you fix.

(47:42):
An example is cybersecurity.
A lot of time folks don't have a great cyber position that where they're are in their journey.
And so there's two ways to handle that.
Number one is you remediate before transaction or number two is we find a way to position
the cyber journey, i.e. there's a plan to get this remediated.
Here's the pieces and components we've done.
We're 14 months out from getting this done.

(48:05):
That type of honesty, when I received that document, I go, okay, they may not be where
they need to be today, but at least they have a thought and a plan to get there.
The challenge is when you're not transparent, there's A, it's not reviewed and B, there's
no plan to remediate.
So now you're in the middle of a buy side diligence most likely, or an internal review
by the team scrambling to put together that plan.

(48:26):
And if we've done this correctly, 12 months in advance, I already have it.
So that time to close the deal is shortened.
The value back to the ownership team is shortened.
The confidence of the buyers to say, wow, these folks were really direct.
We went through a buy side diligence and nothing came out of the buy side diligence that I
didn't see in the sell side or in the SIM.

(48:46):
Imagine the comfort you feel as you go through because you're right, no business is perfect,
but we can all be honest.
Yeah, I mean, we've had this thing for years that on the buy side diligence, that what
we want to see is we obviously want to read about the business in the SIM, look at the
data about the business in the data room.
We want to have what we've observed about the business from afar through the data review

(49:07):
process, to kind of map to what we're hearing management talk about the business and also
map it to what we're seeing actually happen in the business, whether that's on the factory
floor, throughout the organization.
It's kind of triangulating those three things, data room, management's words, what's actually
happening in the business.

(49:28):
If you're not kind of coordinating those three things, you got to remember most people who
can buy businesses of scale, right?
Most people who have somewhere between 20 and several hundred million to a billion,
or several billion dollars in some cases to go and buy a business, they're usually pretty
sophisticated buyers of businesses, right?
People don't tend to generate that level of wealth without a reasonable amount of sophistication

(49:49):
or be able to manage that amount of wealth without a reasonable amount of sophistication.
Just being transparent and making sure people are forthcoming about what people are buying
because they're going to find it anyway.
We have found, and I think most investment bankers would agree with this, is that generally
speaking, unless there is like a really nasty skeleton in the closet, something that would
scare off most folks, most buyers aren't going to overthink things that I think a founder

(50:11):
certainly or maybe a less experienced operator owner of a business is going to worry about,
like, oh, I don't have the latest, greatest ERP system.
Oftentimes, that's fine.
But don't try and advertise your not latest, greatest ERP system as the best thing since
sliced bread because people are going to find that out.
You're much better off saying, hey, we don't have the sexiest ERP system in the world,

(50:32):
but it works for us for these reasons as attested to by these experts.
We actually think that we can triple the size of this business without having to go through
an ERP change or flip side of that coin.
We've outgrown our ERP system.
We know we need to make a change.
We've gotten some experts involved who have helped develop a plan and put together a cost
budget and really vetted that against other benchmarks.

(50:54):
We think these numbers and this timeline is very achievable for those reasons.
Then a buyer goes, well, jeez, yeah, I prefer not to have to go through an ERP upgrade process
because that could take a year or two, but jeez, these guys seem to be really thoughtful
about it.
They've got the numbers.
I can bake that into my financial model.
Less risk for me and less work that I have to do as a buyer.
I don't have to go diligence that entire thing on my own.

(51:16):
Maybe I can hire an expert to come in and just review that sell-side diligence work
product and say whether or not they think that's good, bad or indifferent.
I think that's what's lost on a lot of people sometimes is how much money the buyers can
save.
I think what's lost on people is how much money buyers will spend to do diligence on
target acquisitions that they may not even end up acquiring.

(51:37):
If you think about it from that perspective, if you've got 10 buyers for your business
that are interested, if each one of them would have to go and spend a couple million dollars
on outside experts to build their diligence teams out to look at that business, that's
tens of millions of dollars being spent, but only one of them is going to prevail.
All nine other buyers, and nobody knows who's going to prevail at the onset, all nine other

(51:59):
buyers, they're having to take on what's called deal risk exposure or transaction expense
exposure, where if you've packaged up a really nice, really thoughtful sell-side diligence
packet for them and you're giving them that work, maybe you've taken on the risk to spend
the money and you're helping them get ramped up to speed and educated faster on your business.
They don't have to spend several million dollars each.

(52:20):
Maybe they can just spend a couple hundred thousand dollars each.
They can get deeper into the process.
You have more of an opportunity to convince them that you've got this great business.
They should want to partner with you.
It drives up the competitiveness and hopefully, ultimately, that all leads to a higher transaction
price and a faster transaction process too, which is really important.
Time kills all deals is a saying that we have and that continues to play out every single

(52:41):
time.
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