Early sell-side readiness is crucial for planning and executing a successful exit strategy.
Key takeaways
Businesses can take steps to prepare while minimizing potential risks and disruptions.
Skipping essential steps can lead to significant risks, including extended sale processes.
Preparing for a business sale can be a complex and challenging process, but early sell-side readiness can significantly reduce disruptions and risks while maximizing the chances of a successful transaction. Middle market companies that adopt proactive strategies can gain an edge by accelerating data responses, addressing potential buyer questions through mock interviews and enabling bankers to bring businesses to market more efficiently. Early preparation also ensures smoother deal execution by identifying and resolving key challenges ahead of time.
Understanding the ideal timeline for sell-side readiness is crucial for planning and executing a successful exit strategy. RSM’s transaction advisory services advisors break down the process into clear, actionable steps to show how businesses can prepare effectively while minimizing potential risks and disruptions.
The ideal timeline for sell-side readiness
Step 1: Pre-planning (one to two years before exit)
The pre-planning phase sets the foundation for a successful sale, beginning well in advance of the anticipated exit. For companies targeting a transaction, this stage is critical for creating a roadmap that facilitates readiness and resilience. Looking ahead, with a timeframe of roughly two years, businesses can refine their operations, establish clear goals and build the financial reliability that potential buyers seek. Even a short-term perspective of 12–18 months allows for meaningful progress in addressing key readiness factors.
- Activities: The pre-planning phase involves a comprehensive business review to identify operational inefficiencies, enhance financial reporting processes and set strategic priorities. This period should also focus on resolving structural issues that could hinder the sale process.
- Dependencies: Success in this stage depends on sufficient internal capacity to allocate resources, reliable historical financial and operational data, and alignment among stakeholders on the company’s long-term objectives.
- Benefits: Early preparation increases the company’s valuation, creates a framework for smoother processes in later stages and ensures that the business can provide two fiscal years of clean, accurate data for buyers to evaluate.
Step 2: Pre-sale preparation (six to 12 months before exit)
With the timeline narrowing, pre-sale preparation becomes the most crucial phase for readiness. At this point, businesses refine their value proposition and ensure all financial, operational, legal and compliance elements are in place to position the company as a credible and attractive acquisition target.
- Activities: Key activities include completing a business data cube to substantiate the company’s equity story, preparing a quality of earnings (QoE) analysis, conducting tax attribute and step-up assessments, and structuring the business for optimal tax outcomes. Businesses should also enhance data management practices to ensure data accuracy and accessibility while addressing any regulatory or compliance issues.
- Dependencies: The effectiveness of this stage hinges on the availability of updated financial and operational information, and the ability to address buyer-specific concerns, such as industry benchmarks or regulatory requirements.
- Benefits: By solidifying these elements, companies mitigate the risk of delays, ensure readiness for buyer scrutiny and build a compelling case to attract serious buyers.
Step 3: Active marketing (three to six months before exit)
As the sale draws closer, the active marketing phase begins. This stage involves engaging directly with potential buyers and building momentum for the transaction. The goal is to create strong initial impressions and maintain confidentiality while highlighting the business’s strengths.
- Activities: Marketing activities include preparing sales materials, reaching out to potential buyers, managing confidentiality agreements and handling initial buyer interactions. A clear communication strategy is vital during this phase to manage expectations and spark interest.
- Dependencies: Effective buyer outreach relies on well-prepared marketing documentation and the readiness of internal teams to address early inquiries. The groundwork laid in earlier stages supports the smooth execution of this step.
- Benefits: A structured marketing approach ensures a seamless transition from preparation to buyer engagement, maximizing the likelihood of attracting qualified buyers who align with the business’s goals.
Step 4: Buyer due diligence (six to eight weeks before exit)
The due diligence phase is when buyers examine every aspect of the business in detail. This stage is critical for verifying the company’s claims and identifying potential risks. Well-prepared companies can save significant time and avoid disruptions.
- Activities: During due diligence, buyers review financial and operational data, tax records, compliance documentation and QoE reports. This phase may involve numerous follow-ups and clarifications, so having accurate, organized information is key.
- Dependencies: Reliable financial and tax data, thorough QoE analyses, business data analytics and robust data management practices are essential for facilitating a transparent and efficient review process.
- Benefits: Proactive preparation reduces the likelihood of deal fatigue, increases buyer confidence and mitigates risk, ensuring a smoother path to closing.
Step 5: Closing (two to four weeks before exit)
The closing stage represents the culmination of the sell-side readiness process. At this point, the business transitions ownership, finalizes legal agreements and secures regulatory approvals. Meticulous planning during earlier stages is critical for avoiding last-minute complications.
- Activities: Final activities include negotiating and signing the sale agreement, completing any outstanding regulatory approvals and managing the transfer of ownership. This stage requires close coordination among legal, financial and operational teams.
- Dependencies: A successful closing depends on all previous steps being executed effectively to avoid any unresolved issues.
- Benefits: A smooth closing process builds trust with buyers, minimizes stress for sellers and helps secure the intended value of the transaction.
The importance of post-closing price adjustments in M&A deals
Virtually all mergers and acquisitions are subject to post-closing price adjustments, which are typically finalized 30 to 120 days after the transaction’s closing date. These adjustments reconcile the closing financial results with both the buyer’s and seller’s expectations, as outlined in the purchase agreement. This is a critical step to show the agreed-upon valuation aligns with the company’s actual financial position at closing.
Many inexperienced buyers and sellers overlook this phase, leaving significant financial value on the table. Sophisticated buyers, particularly when acquiring smaller companies, often leverage this process to their advantage. Well-prepared parties with experienced advisors can mitigate risks and maximize returns by thoroughly analyzing working capital targets, reviewing certain definitions within the purchase agreement including indebtedness and tax matters, and carefully drafting the accounting principles.
Post-closing adjustments are not an afterthought—they are an essential component of the deal that can materially affect the final transaction value. Both sides benefit from careful preparation and expertise to navigate this complex but lucrative aspect of the deal lifecycle.
The takeaway
Skipping essential sell-side readiness steps can lead to significant risks, including extended sale processes due to the need to correct records, lower valuations from missed add-backs or insufficient performance validation, and deal fatigue that pressures sellers to accept suboptimal terms. Operational disruptions, unanticipated buyer concerns and reputational harm from regulatory lapses further underscore the need for early preparation.
To mitigate these risks, companies should engage a qualified, experienced team of advisors to identify exposures and optimize their structures. Secure, transparent data systems that address buyer requests swiftly along with scenario analyses to anticipate potential challenges are crucial for successful transactions. Leveraging technology and robust data management practices ensures legal compliance, facilitates efficient due diligence and enhances buyer confidence.
Client spotlight: Preparing a family business for sale
After more than 90 years in business, a family-owned industrial manufacturer decided it was the right time to sell the company. Having limited experience in M&A and with so much at stake, the family recognized the importance of sell-side readiness and engaged RSM to recommend what steps to take and when to take them in order to achieve the most favorable outcome.
15 months pre-sale
RSM met with the family to outline the sale process and discussed areas where the firm could assist, including:
- Introducing and helping select an investment banker
- Developing a comprehensive data cube for revenue and margin to substantiate the equity story
- Conducting a QofE analysis
- Developing a sell-side tax readiness plan, including tax attribute modeling and structuring
- Addressing management and key employee compensation/bonus strategies
10–12 months pre-sale
The client engaged an investment banker. RSM was retained for the QofE and sell-side tax assistance including:
- Performing business data analytics and a QofE analysis
- Performing a tax attribute analysis and monitoring the tax consequences of potential deal structures, codeveloping an optimal structure
- Providing guidance on incorporating charitable giving strategies into pre-sale planning, which aligned with the shareholders' goals
- Recommending pass-through entity tax elections and identified a tax optimization opportunity that increased the shareholders' after-tax proceeds by $3 million
- Reviewing the company’s non-income tax exposure (e.g., sales and use taxes) to identify $1 million in liabilities; RSM also worked with the client to mitigate the exposure and gather documentation to support compliance efforts
Six months pre-sale
As the company entered the market, RSM continued its work with:
- Scheduling discussions with prospective buyers to explain the tax structure and attribute model
- Responding to preliminary tax-related questions and providing clarity around the company’s tax function
Two months pre-sale
During the due diligence phase, RSM was instrumental in:
- Advising the client on an optimal net working capital target and creating accounting principles to mitigate post close disputes and prevent deal leakage
- Advising the client on prioritizing and organizing data requests
- Interpreting buyer advisor questions and participated in diligence calls
- Addressing buyer concerns about the identified sales tax exposure and providing documentation and perspective to mitigated further scrutiny
Two to three weeks pre-sale
Late in the process, the buyers proposed a $5 million tax escrow related to sales/use tax exposure. Leveraging the firm’s prior analysis and robust documentation, RSM was able to reduce the escrow to $1.5 million and shorten the escrow duration from 24 months to 12 months.
An optimal outcome
The deal closed successfully, and the family was highly satisfied with the process and results. By engaging RSM early, the family avoided common pitfalls and achieved optimal outcomes, including:
- Stronger positioning in negotiations with sophisticated buyers
- Reduced tax escrow requirements, minimizing restrictions
- Tax savings through elections and strategies that increased after-tax proceeds
Early sell-side readiness led by experienced advisors is critical to navigating the complexities of M&A. Proactive planning helps uncover value, mitigate risk and facilitate a smoother execution.
RSM contributors
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Patrick BrennanPartner -
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Jason FennessyPartner -
Oliver SnavelyPartner -
Anthony TrottaPartner -
Abay ZhunussovPrincipal
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