Connect commercial and financial diligence for a smoother exit
Executive summary
Strong sell-side commercial due diligence (CDD) and financial due diligence (FDD) provide distinct and critical perspectives, but can still create friction for a buyer if their data, definitions and conclusions don't align. Sellers should conduct CDD and FDD through a connected workstream that is built on a shared data foundation to help surface risks and value drivers earlier while giving buyers consistent, granular evidence to test the investment thesis.
Commercial due diligence (CDD) and financial due diligence (FDD) are both essential to a well-prepared exit. But without close coordination between the two workstreams, disparate data presentation between the reports can distort the story of the business.
Deal advisors may use different terminology or methods of organizing data. The burden then falls on the seller, or even the potential buyer, to reconcile any differences between the reports. That can consume valuable diligence time and delay the buyer’s investment decision.
“Diligence is expected to become more complex as buyers become increasingly sophisticated in their analysis of the target’s business, in context with underlying market conditions. That could put additional pressure on already demanding deal timelines,” said Barrett Popst, Grant Thornton Transaction Advisory Services Partner. “Sellers have more information, analyses and findings to keep aligned. Preserving perspectives from financial and commercial workstreams while creating greater connectivity between them can give sellers a more complete view of the factors likely to shape the transaction.”
"The disconnects are often in the details," added Will Barden, Grant Thornton | Stax Partner. The FDD team may report revenue by product line or legal entity, while the CDD team segments it by end market or customer type. One report may count customers at the parent level and the other by billing account, or 'recurring revenue' may mean contracted revenue in one report and repeat purchasing in the other. These differences likely make sense in the respective reports, but if they require extra time for a buyer to reconcile, that's time taken away from a deal closing faster."
These disconnects also extend to the underlying data. Many sell-side processes now include a transaction data cube, a granular, drillable data set that buyers use to test both the quality of earnings and the commercial findings.
“When the FDD report, the CDD report and the data cube are built from different extracts or definitions, buyers end up reconciling three versions of the business instead of one,” said Colin Singleton, Grant Thornton Transaction Advisory Services Partner. “Building all three from a single, governed data model helps prevent that problem. When customer, product, end-market and billing-entity hierarchies are agreed upon up-front, with revenue and cost reconciled to the financials, the numbers remain consistent wherever a buyer looks.”
Greater coordination between CDD, FDD and data analytics teams can shift some of that reconciliation upstream. When relevant findings, definitions and data are shared as the work progresses, teams can resolve questions between workstreams before they create more work for the seller or raise additional questions for the buyer.
Sharpen your story before sharing it with the market
During exit preparation, sellers have an opportunity to decide how they want to explain the business before potential buyers begin testing the investment thesis. Greater connectivity between CDD and FDD can help sellers make better use of that opportunity by bringing financial performance into context with market dynamics, customer trends and operating factors such as pricing changes or product expansion. Sharing findings across workstreams can surface questions or relationships that may be less apparent when each analysis is viewed on its own.
Identifying a financial, market or operational concern before going to market gives sellers an opportunity to understand the issue, conduct additional analysis where necessary and determine how it affects the investment thesis.
"The goal is to identify potential issues early, address what can be addressed and reduce surprises once the business is in market," Popst said.
That matters for both experienced firms and founder-owners that are approaching taking their first business to market.
"PE sponsors need to be able to demonstrate how the investment thesis has developed during the hold period and supports the next phase of the company's growth story," Barden said.
Private owners, particularly those approaching their first transaction, often face a capacity challenge: management may be going through an intensive sell-side diligence process for the first time while continuing to run the business.
"Running a sale process and running the business can feel like two full-time jobs for management," Barden continued. "Having CDD, FDD and other sell-side workstreams coordinated under one roof gives management a single point of accountability and reduces the number of touchpoints they need for coordination and updates.”
How we can help you
SERVICES
INDUSTRY
Turn a shared data foundation into deeper insight
Beyond preventing reconciliation issues, a connected data set also allows CDD and FDD teams to apply advanced analytics and AI to questions buyers are most likely to ask, and to answer them through a consistent lens.
Buyer questions advanced analytics and AI can help answer
- Is growth durable? Customer cohort, retention and net revenue retention analysis can tie reported revenue to the underlying customer demand described in the commercial view.
- Where are margins really made? Price-volume-mix bridges and profitability by customer, product, channel and geography can show whether margin trends are consistent with pricing and mix.
- Is the market outlook credible? External and alternative data, such as web traffic, hiring activity, pricing data and spend panels, can be benchmarked against company KPIs to ground the market outlook in the same metrics the FDD reports.
- Are there hidden risks? AI-assisted contract review can flag change-of-control, pricing and termination terms across hundreds of agreements, while anomaly detection on general ledger and transaction data can surface potential quality of earnings adjustments and debt-like items early.
- What do customers really think? AI-enabled analysis of reviews, support tickets, survey responses and interview transcripts can strengthen voice-of-customer findings and corroborate retention trends.
“AI is also changing the pace of diligence,” Singleton said. “These tools can review large volumes of documents, synthesize interviews and flag unusual patterns in a fraction of the time manual review requires, freeing diligence teams to focus on what the findings mean for value.”
When analytics are applied early in exit preparation and connected to CDD and FDD findings, diligence can help improve business outcomes before the company is sold.
“Analysis performed several months before going to market can identify value levers, such as pricing leakage, unprofitable customers or products or pockets of churn that management still has time to address during the remaining hold period,” Singleton continued. “That same detailed, data-backed evidence can then help sellers defend valuation and reduce re-trade risk later in the process.”
What to consider before going to market
CDD and FDD will continue to bring distinct perspectives and expertise to a transaction. Sellers must decide how effectively those perspectives will connect once the work is underway.
As part of exit planning, sellers should consider:
- How information will move between workstreams: Consider how CDD and FDD teams will exchange relevant findings as the work progresses through cross-workstream discussions, consistent definitions and data sets and a process for raising findings that warrant input from the other team.
- Whether data is diligence-ready: Sellers should assess whether source systems can produce clean, reconciled and sufficiently granular data, and agree on a single set of definitions to use across FDD, CDD and any data cube provided to buyers.
- Where the commercial and financial views intersect: Sellers should identify the areas where buyers are likely to test the relationship between financial performance and the commercial outlook. For example, do revenue trends align with customer demand and retention? Do growth expectations reflect what the market can support? Are changes in margins consistent with pricing, product mix and other underlying business trends?
- Sell-side preparation needs beyond CDD and FDD: Depending on the transaction, sellers should also identify and mitigate potential tax exposures and determine which tax benefits can be conveyed to the buyer; prepare for net working capital negotiations and make sure purchase agreements reflect the spirit of the deal; and, in carve-out, analyze standalone costs and prepare to negotiate transition services agreements.
Contacts:
Partner, Transactions
Grant Thornton Advisors LLC
Barrett is a Partner and a leader, of our Divestiture Advisory Services practice with over 18 years of experience in financial statement analysis, financial and operational due diligence, project management and executive leadership.
Dallas, Texas
Industries
- Manufacturing
- Technology
- Transportation & Distribution
- Retail & Consumer Brands
Service Experience
- Advisory Services
- Transaction Advisory
Partner, Transactions
Grant Thornton Advisors LLC
Colin Singleton is a Transaction Advisory Services partner who leads both buy- and sell-side due diligence projects including for stand-alone acquisitions, corporate carve-outs, add-on transactions, joint ventures and lending situations ranging in size from under $10 million to over $50 billion.
Arlington, Virginia
Industries
- Manufacturing
- Technology
- Transportation & Distribution
- Private Equity
Service Experience
- Advisory Services
- Transaction Advisory
Content disclaimer
This Grant Thornton Advisors LLC content provides information and comments on current issues and developments. It is not a comprehensive analysis of the subject matter covered. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content.
Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
For additional information on topics covered in this content, contact a Grant Thornton Advisors LLC professional.
Ready to talk? We’re ready to listen.
Request a meeting and a member of our team will be in touch to see what we can do to meet your needs.
Want to submit an RFP? Please submit your request through our RFP submission page.
Share with your network
Share