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Sell-Side Due Diligence: A Smart Deal Strategy to Minimize Surprises and Maximize Value

Second Quarter 2015

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As more restaurant companies come to market, buyers need to focus on deals they can close. How can you make your restaurant stand out?

Many leading bankers require sell-side due diligence on the companies they are taking to market. By thinking like a buyer in advance of a sale, and focusing on areas of concern to an acquirer, a seller can boost its credibility with buyers. This can reduce the possibility of unwelcome surprises and increase the likelihood of a successful transaction. Moreover, sell-side due diligence may help drive valuation.

What is sell-side diligence?

Paid for by the seller,  sell-side diligence is a process that is designed to help management present the restaurant they are selling in the best possible light and speed up the sales process. While it is conducted from a buyer’s perspective with the goal of increasing buyer confidence, seller management retains control of the scope.

What does sell-side diligence entail?

The process addresses the issues relevant to potential buyers and includes an in-depth analysis of the financial performance of the restaurant. It helps the seller prepare for negotiating the sale of the business by identifying issues that may become topics of contention during the sales process.

Typically, sell-side diligence focuses on the areas of most concern to buyers, including:

  • Business environment
    • History, timeline, and structure of the business
    • Company’s competitive and regulatory environment
    • Issues and/or opportunities inherent in the seller’s business
    • Opportunities for the buyer to create and maximize value
  • Operations
    • Strategy for procuring, producing, distributing, marketing, and selling
    • Governance policies and procedures
    • Quality of management and other personnel
    • Information technology
    • Cash generation of the business
    • Historical and future capital expenditures
  • Historical results
    • Quality of earnings, working capital, debt, commitments and contingencies, cash flow, seasonality, potential exposures
    • Tax diligence and exposure; opportunities to capture value
    • Employee benefits (retirement plans, funding obligations, etc.)

Sell-side diligence may also include an analysis of whether the growth projected by restaurant management is reasonable based on historical performance. It can identify deal issues and give management the ability to correct or formulate a response to challenging questions. In addition to uncovering these issues, sell-side due diligence can also identify positive findings such as add-backs that will drive valuation.

The sales process is complex and can easily monopolize management’s time. A sell-side advisor can assist management by handling many of the tasks associated with the sales process.

What are the advantages of sell-side diligence?

Valuations never go up from a buyer’s due diligence. However, seller due diligence is another story. It makes the process easier, shows a buyer that management is serious about doing a deal, and allows management to address areas of concerns before going to market. Like selling a house, a clean one fetches a higher price than a dirty one.

Several private equity firms are now requiring their portfolio companies to conduct their own internal diligence in advance of an exit. They see sell-side due diligence as a way to prepare management teams for the scrutiny associated with the sale process, to get them comfortable with the presentation of financial information, and to avoid circumstances that could be perceived as flaws to prospective buyers.

Does sell-side diligence replace buy-side diligence?

It is unlikely that sell-side diligence will replace buy-side diligence. However, to the extent that buyers want to rely on the sell-side diligence report, they can potentially reduce their own costs and complete the sale process in a quicker time frame.

What are the costs and impact on the seller’s management team?

Conducting proper sell-side due diligence requires time and money. However, sell-side due diligence can more than pay for itself by attracting maximum value for the company and allowing management to focus on running the business. If the sell-side due diligence process is conducted properly, there should be no question posed by the buyer that the seller is not prepared to answer.

What Does CohnReznick Think?
Buyers want and expect transparency. Therefore, a fair and balanced sell-side due diligence report is a valuable tool for both parties. For the seller, it can provide greater control over the sale process and timing of the sale, while reducing disruptions to the day-to-day business. The proactive due diligence that sellers undertake will help them stand out among other sellers, resulting in fewer surprises during the sales process. It can also reduce the possibility of leaving value on the table. For buyers, sell-side diligence provides greater insight into the organization. This increases their level of trust and confidence in the business and their willingness to move forward with the deal.


For more information, please contact Gary Levy, a CohnReznick partner and the Firm’s Hospitality Industry Practice Leader, at or 646-254-7403.

To learn more about CohnReznick’s Hospitality Industry Practice, please visit our webpage.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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