Exit volumes are at their lowest levels since 2016, with the median portfolio company hold periods reaching their highest levels in more than a decade at 6.4 years. Because of this, private equity firms are eager to start preparing their assets for an exit. Traditionally, private equity investors conduct sell-side due diligence processes as part of their exit readiness strategy with a focus on financial due diligence, quality of earnings and internal controls/SOX processes. Today, private equity firms are integrating a more holistic approach to account for prospective buyers spending more time assessing increased risk areas that include AI and machine learning models, cybersecurity and supply chain issues. 

Jawad Hussain, partner and head of MorganFranklin Consulting’s Private Equity Services team says, “An integrated sell-side due diligence process should be conducted six months to a year prior to a sale. This process provides private equity firms with a roadmap to identify and remediate key commercial, operational and IT red flags to ensure the appropriate valuation of portfolio companies.”  

Key components of a holistic and integrated sell-side due diligence process include: 

  • FDD and QoE process: Assessing historical financial and go-forward financial projections in addition to internal controls and SOX compliance review. 
  • IT and cyber diligence: Analyzing a portfolio company’s ERP systems, product and code quality and scalability, and the maturity of a portfolio company’s cyber and data capabilities, including AI and ML. 
  • Commercial and operational diligence: Assessing a portfolio company’s commercial performance against their peers and assessing their existing operating model, cost structure and key processes. 

Overview of Sell-Side FDD and QofE Processes 

MorganFranklin’s integrated sell-side due diligence approach centers on the foundation provided by the sell-side FDD and QofE. This unique strategy aims to validate a portfolio company’s historical financials and future financial projections by:  

  • Summarizing historical financials using 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. 

Overview of Sell-Side Technology and Cyber Diligence  

Given the rise in cyber insurance underwriting risks and the increasing importance of having a robust technology and AI/ML infrastructure to support future deals, this diligence should be considered a necessary step for sell-side activities. Identifying potential IT 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.  
  • Reviewing current product and code quality, including product development processes. 
  • 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. 

Overview of Sell-Side Commercial and Operational Diligence  

The sell-side commercial and operational diligence process should focus on identifying critical issues such as revenue and margin leaks, along with risks associated with current sales and operations planning processes. These issues should be addressed promptly before the exit process begins. A successful commercial and operational due diligence requires a thoughtful cross-functional approach, involving: 

  • Reviewing market benchmarks, like revenue, cross-selling 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 management’s capacity to navigate future operational and revenue growth. 
  • Assessing all key operational costs and processes including selling, general and administrative expenses, supply chains and order to cash. 

Key Takeaways 

By integrating the findings from a holistic approach, an integrated sell-side execution roadmap is created. This roadmap should identify key opportunities for the portfolio company to capitalize on, as well as risks to address before the sale process, including control gaps, revenue and margin leaks, or ERP issues. This integrated process and roadmap enhance the sell-side FDD report by validating the portfolio company’s future financial projections and help prevent unforeseen circumstances that could disrupt the exit process. 

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How MorganFranklin Can Help

MorganFranklin Consulting has an experienced team of former executives and private equity professionals who work with portfolio companies to execute holistic sell-side processes that improve exit valuations. Our proven sell-side methodology streamlines the exit planning process and enables deal success.

Learn how MorganFranklin Consulting can help improve your sell-side processes. Contact us today.

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