Aligning Management on the Value of Sell Side Operational Due Diligence - TriVista

Aligning Management on the Value of Sell Side Operational Due Diligence

Sell side operational due diligence can help companies maximize enterprise value at sale. A critical component of the process is working with the management team to ensure alignment with go-forward strategy such that during the sale process there is a comprehensive operational plan and solid evidence that action is being taken to implement the plan.

Potential buyers should see tangible evidence of the company’s vision and recognize that management is either executing on that vision or has a detailed plan in place. When potential buyers realize that level of commitment, it increases their confidence in execution and often generates a price premium.

Increasing Buyer Confidence

A sell side operational due diligence provides a thorough examination of operational factors that contribute to EBIT (earnings before interest and taxes), including the supply chain, manufacturing productivity, inventory controls, labor and a great deal more. This assessment ensures that the value conveyed in financials is solid which gives potential buyers more confidence in the future opportunity. For example, a good Quality of Operations® assessment can:

  • Quantify cost savings opportunities
  • Identify process improvement areas
  • Identify ways to grow capacity
  • Evaluate the capability to scale
  • Reduce the time to sale
  • Call out risks and lower the likelihood of surprises

Management Makes It Real

Let’s take an example. A sell side operational due diligence was completed on a $300 million industrial components company.  The assessment included a review of the company’s North American manufacturing footprint to determine optimization opportunities. The assessment team performed an operational review and comparative analysis for each facility and developed a plan for consolidating the footprint and optimizing the processes. The assessment included timelines and plans for transition and sequencing and a financial analysis that included one-time costs and ongoing savings associated with the effort. The results were substantial:

  • More than $2.7 million in EBITDA expansion
  • More $7.5 million in inventory reduction

Yet, impressive as they are, these improvements are just numbers in a spreadsheet. It requires buy-in from management to transform them to an active strategy, with proof points that show potential buyers that the plan can be executed.

When a sell side operational due diligence is done early, perhaps 3 to 9 months before a sale, projects can be initiated, and savings can start accumulating at close. While a report can be done in a matter of weeks, it may take longer to begin making changes.

It is critical to hire an experienced and credible operations evaluation team. This team will have an efficient system to conduct assessment work, including site visits, personnel interviews, extensive discussions and face-to-face communication with top managers and C-Suite executives. They will understand the important role that management plays and how to ensure that company management invests in the strategy being created.

Investors and management teams that are aligned on the value of sell side operational due diligence can better execute their go-forward strategy. It provides a plan to increase enterprise value, reduce risk and expedite the time to sale. It also creates a blueprint for management to participate actively in the sale and strengthens their own operational plan.  A strong sell-side plan allows sellers to proactively prepare themselves for the buy side diligence in advance. It can also give potential buyers confidence in both the financials and opportunities for future growth, making for a seamless and successful sale.