The Adoption of Sell-Side Due Diligence

Here's a checklist of key considerations

In 2018, private equity funds invested more than $380 billion in capital. As the number of active private equity funds continues to grow, and dry powder reaches historic levels, which McKinsey & Company estimates totaled $1.8 trillion at the end of 2018, so does the demand for new deals and investment opportunities.

This heightened demand for deals, in conjunction with several years of active seller markets, has led to increased scarcity of “A-class assets” but contributed to record valuations and multiples. These dynamics underpin the need for buyers, sellers and lenders to have greater confidence and certainty around the results and financial health of the business, driving the adoption of sell-side financial due diligence services by both private equity and strategic sellers.

For more than a decade, sell-side financial accounting due diligence has become increasingly common in transactions within the U.S. — a trend that has been prevalent for many years in Europe. Sell-side diligence encompasses an analysis of a company’s earnings and accounting policies by an outside advisor and often is shared with potential buyers of the given business.

Sell-side due diligence provides sellers, whether they be founders or private equity sponsors, with the opportunity to put their best foot forward and highlight positive news and business trends that may not be apparent in the reported results of the business. It also allows an independent advisor to highlight potential opportunities and risks to bidding investors that may not be apparent from standard audit reports, footnotes and bank covenant reporting requirements. In recent years, sell-side diligence has become an expected component of transactions led by investment banks occurring within all levels of business sophistication, including those in the lower and middle markets.

The expansion of sell-side diligence also has enabled investment banking professionals and business owners to focus on the operational sale process without the distraction of trying to discern varying GAAP accounting treatments and the reliability of reported figures. Instead, banking professionals and sellers, including private equity owners, are able to work in tandem with financial accounting diligence teams to ensure financial figures incorporated into transaction documents are credible and analyzed, most often resulting in greater certainty heading toward a transaction close, which mitigates the risk of a purchase price re-trade due to financial results.

Private equity professionals are increasingly encouraging and accepting of sell-side diligence engagements upon investment exits, as the process tends to highlight key savings, synergies and positive news, which previously would have remained with only investment banking professionals to disseminate. Detracting from these benefits, buyers must be skeptical that a sell-side diligence team may favor bias toward its own clients, given the lack of recourse and exposure in presenting one-sided financial information to potential investors. This inherent risk, along with financing requirements, pushes most buyers to engage their own service providers to analyze the sell-side due diligence work product. This ultimately provides buyers with a level of certainty in their own valuations, reducing the risk of bias from a potentially one-sided EBITDA analysis.

BKD’s team of highly experienced and dedicated financial due diligence professionals developed a checklist of key considerations that highlight the potential needs and/or benefits of performing a sell-side diligence project upon the divestiture of a business, whether private equity held or founder owned:


  • Do your business’s annual reported results reflect the full effect of significant positive changes and recent developments?
  • Are any accounting or business practices subjective, which could require explanation or consideration by an outside investor?
  • Are internal finance/accounting resources stretched and unable to take on a full sale process currently?
  • Is the sale of your business imperative? Will any uncertainty or purchase price re-trade have significant repercussions on your business, financing or you personally?
  • How important is a “fast” sale process and close?
  • Do you have a “story” to tell, which could become lost within a board group of potential bidders?
  • Would the management team benefit from a dry run or practice diligence session prior to facing buyer advisors?
  • Would the seller benefit by keeping more bidders engaged longer through transparent information sharing?


Driven by the rise in demand for sell-side diligence, the number of firms providing the services has grown, resulting in a significant divergence in the quality and level of analysis performed by engagement and firm. Sellers and users of sell-side due diligence reports should thoroughly understand the procedures and level of scope performed, as well as the reputation and sophistication of the transaction team/firm that performed the services. Thorough documentation and expanded reporting within sell-side deliverables can help give users confidence in the level of work performed, potentially mitigating a buyer’s need to perform full buy-side due diligence.    

Every seller, including private equity and founder owners, should consider the benefits and pitfalls of engaging a sell-side diligence project. While a sell-side may not always uncover/mitigate potential “bad news,” it can provide peace of mind for sellers looking for certainty to close and assurance of results being brought to market. Further, in many circumstances, sell-side due diligence may keep multiple bidders involved longer, which can help maintain value through competitive tension.

For more information, contact Brian or your trusted BKD advisor.

(This sponsored content was provided by BKD.)


Brian Myeroff, CPA

Brian Myeroff, CPA, is the director of BKD’s Transaction Services division based in Denver. With more than 10 years of experience with mergers and acquisitions, he provides buy-side and sell-side financial due diligence services to private equity and strategic investors.  He has experience across a wide range of industries, including manufacturing and distribution, waste management, automotive, telecommunications, retail, consumer products and business services as well as tech-enabled and eDiscovery services. Email him at or call 303-861-4545.

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