Buy-side vs sell-side diligence, explained simply
The two examine the same business from opposite sides of the table. A buy-side report is the buyer’s independent view. A sell-side report gives the seller control of the earnings narrative and shortens the process, although buyers normally still perform confirmatory work.
A sell-side report is only as credible as its independence, so it should include adjustments that reduce EBITDA as well as those that increase it.
Two views of the same business
IllustrativeSell-side work moves the discovery of issues from the buyer’s late-stage review to the seller’s preparation.
Worked example
Four months before launching a sale process, Alder Creek’s owner commissions a sell-side QoE. It identifies the unrecorded bonuses and below-market related-party rent. The owner corrects the accounting and markets the business on adjusted EBITDA of $4.6 million rather than $5.0 million.
Without this work, a buyer would likely have identified the same issues in week five of diligence and reduced the price from $40.0 million. A late price reduction also costs credibility and can end a transaction.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Sell-side diligence gives the seller control over how issues are presented and sequenced. Buyers still typically perform a shorter confirmatory review, but it is faster and better focused.
Red flags
- A sell-side report containing only adjustments in the seller’s favor
- A sell-side report prepared on an outdated period