This document provides an overview of managing sell-side due diligence for mid-market private companies. It discusses: - The typical steps involved in an M&A sale process, which generally takes 4-6 months and includes preparing the company, marketing to potential buyers, conducting due diligence, negotiating offers, and closing the transaction. - Key aspects of preparing a company for sale including ensuring paperwork is in order, cleaning up the balance sheet, improving physical appearance, developing a business plan, and preparing management. - Common due diligence activities undertaken by buyers to evaluate whether to make an offer, how to structure the deal, and how much to pay. This includes financial, legal, technical, and

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Due Diligence in M&A
A sell-side perspective
May 2018

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EXECUTIVE SUMMARY
A firsthand account of managing sell-side due
diligence for mid-market private companies
When entrepreneurs or shareholders seek to sell their ownership in mid-market companies,
whether due to retirement, inability to find a successor or the desire to move into new ventures, it is
more likely than not that the sale process is their first, and the only, process that they will go
through in their entire career.
While professional executives or CEOs may have experienced the M&A process a number of times,
and may therefore be better positioned to manage the arduous undertakings that are required,
managing the due diligence process for the sale of a company can be both physically and
emotionally taxing.
The purpose of this paper is to illustrate the typical processes that are involved when selling a
company, from a sell-side advisor’s perspective. I hope that by reading this paper, you will have a
better understanding of the typical due diligence activities that are undertaken by buyers before
they acquire any company.
2017
Sell-side advisor
(Cross-border)
Acquirer
2016
Sell-side advisor
(Cross-border)
Acquirer
SAMPLE TRANSACTION EXPERIENCES
(both award-winning cross-border transactions)

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1 Overview
2 What to expect
3 Preparing the company for sale
4 What you can do
5 Focus on the value drivers
6 What is due diligence?
7 Use of Virtual Data Room
8 Benefits of a well-managed process
9 Potential pitfalls
10 Rigorously promote the case for synergy
11 Conclusion
CONTENTS

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OVERVIEW
So, you’ve decided to sell your company.
What happens now?
▪ The best view comes after the hardest climb.
While appointing a sell-side advisor may ease
the process involved in selling a company, it
does not alleviate the heavy burden of the due
diligence process. It is typical to hear that,
while multiple approaches were made by
potential buyers, these approaches are often
rebuffed because of the ‘extensive due
diligence’ that was required.
▪ However, an experienced sell-side advisor sale
process will be able to “insulate” both the
management and shareholders from the
distractions of the sale process, and provide a
clear roadmap towards a successful sale of
the company.
▪ Understanding the process. Having the right
understanding of what is typically required in
an M&A process, and a clear picture of the
buyer’s requirements, will provide a better
‘pathway’ for the vendors. There are two
lessons to remember, firstly, the
management’s ultimate role is to run the
business and make profits (not bogged down
by a sale process), and secondly, not every
sale process actually results in a favourable
outcome.
▪ It can be disappointing to entrepreneurs when
buyers start to chisel on value or fail to meet
expectations on valuation. At the end of a
failed process, the entrepreneurs are ‘scarred’
by the distraction of the due diligence process
(that impacted its business performance) and
may even decline to entertain future offers
from potential buyers. Knowing what to expect
before entering into a process is therefore
critical.
▪ The typical steps. Below is an illustration of
the typical steps that can be expected in a
sale process, which is explained in detail on
the next page. Generally, a straightforward
sale process will take 4 to 6 months to
complete.
Typical Steps in an M&A Process
Deciding to sell Closing the transaction
Search for potential buyers
Provide preliminary information, including
distribution of Flyers, Information
Memorandum, Financial Information etc.
Facilitate information flow
through the use of a Virtual
Data Room
Solicit preliminary offers
Negotiation and signing of definitive agreements
Solicit binding offers
. . . . . .
Management
Presentation
.
Start of due diligence by buyer

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WHAT TO EXPECT
Steps Remarks
▪ Appoint a Financial Advisor
▪ Strategic planning & preparing game plan
▪ Understanding strengths and weaknesses
▪ Review of potential ‘chinks’ in the armour in preparation for buyer’s due
diligence
▪ Understanding the industry and market participants
▪ Compile and review VDR information
▪ Prepare valuation analysis
▪ Prepare Flyer and Information Memorandums
▪ Contact Potential Buyers
▪ Advisor to shortlist and contact potential buyers
▪ Analysis of buyer-specific synergies
▪ Distribute Flyers or ‘teasers’ ▪ Distribute Flyer to approved parties
▪ Solicit non-disclosure agreements
(“NDA”)
▪ Given that the information memorandum contains sensitive & confidential
information, NDAs are sought to protect the confidentiality of information
▪ Distribute Information Memorandums
▪ Distribute Information Memorandums to approved parties once NDA is
signed
▪ Discussion with Management
▪ This can be deferred to a later stage, although Buyers may prefer having a
discussion with Management prior to submitting their indicative bids
▪ Solicit Indicative Bids
▪ Shortlist Parties
▪ Selected bidders are invited to review more information and to submit a
binding bid following the review of that information
▪ Provides access to Virtual Data Room
(“VDR”)
▪ The flow of information to the potential buyers is typically done through a
VDR, which comprises hundreds of corporate, legal, financial, and tax-related
documents
▪ These documents should be prepared in advance and reviewed by the
company’s legal counsel
▪ Q&A Process Begins
▪ It is usually recommended that the Q&A process is managed through the
VDR environment, which allows for the flow of information to be tracked,
particularly if more than one party is involved
▪ Management Presentation & Site
Visits
▪ It is recommended that management is “tested” with a trial run before the
actual Management Presentation.
▪ The advisor should also prepare scripts and key talking points
▪ Solicit Binding Bids
▪ Select Preferred Bidder
▪ Negotiate Definitive Sale and
Purchase Agreement
▪ Closing of Transaction
There are 2 types of sale process:
(i) a competitive auction process (described below), or
(ii) a negotiated sale with a preferred party.
Type Competitive auction Negotiated Sale
Benefits ▪ Employs a bidding process to achieve the highest
sale value
▪ Protect the confidentiality of information
▪ May result in a quicker process
Disadvantages ▪ Some buyers may decline to participate
▪ Sale process may become publicly known
▪ Consumes substantial time and resources given
the number of parties involved
▪ Potential leak of confidential information
▪ May not result in the highest valuation given
that there is no competitive tension
Typical Steps in a Competitive Auction Process

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PREPARING THE COMPANY
FOR SALE
Before a sale process is formally launched, it is
important to ensure that the company has been
prepped for sale. Just like ensuring that a product
is meticulously and thoroughly checked before it
is introduced to the market, the same standard
should be applied to a company that is being
sold.
There are a number of clean-up activities that can
be actioned upon pretty quickly that can ensure
that a sale process goes more smoothly. These
include:
▪ Ensuring that all paperwork is up to date. For
an example, ensure that all regulatory filings,
such as annual filings to ASIC, have been
completed. Also, undertake a review of the
company’s documents, such as the certificate
of registration, the constitution and the register
of members, are complete as these will be
requested by the buyers. A legal counsel can
assist with a simple review.
▪ Balance sheet “clean-up”. Potential buyers are
likely to be attracted to ‘clean’ companies, as it
reduces acquisition risks and their due
diligence requirements. Financial accounts
should be audited, obsolete inventories and
bad debts should be written off, related party
transactions are documented (negotiated on
an arm’s length basis), and goodwill tested for
impairments. Buyers do not like ‘surprises’ and
any uncertainty may have an impact on value.
▪ Physical. The physical “look” of the company is
often neglected, but it plays an important role
in leaving an impression during site visits.
Repainting the shed, cleaning the pathways,
and reducing onsite workplace hazards are
just like fancy ‘packaging’ that goes with a
premium priced product.
▪ Business plan. One of the most frequent
questions that a buyer will ask is “what is your
business plan?”. Undertaking a strategic
planning process, at the board level together
with the assistance of the financial advisor, will
be crucial in the crafting of the “growth
strategy” of the business. Presenting a
financial projection that is credible and
defendable will influence the buyer on value.
▪ Normalisation. One-offs or non-recurring
income and expenses should be identified and
‘normalised’ from the company’s historical
trading performance.
▪ Intellectual property. Buyers seek for the
‘competitive advantage’ that makes the
company great, and this is often protected by
patents and trademarks. Steps should be
taken to protect the company’s intellectual
property as this goes directly to improving the
valuation of the company.
▪ Preparing management for the sale process.
The management will be the ‘face’ of the
company, and if the management is expected
to stay on with the buyer following the
completion of the sale, their performance in
presenting and outlining the company’s
business case will be the difference between a
blockbuster or a dud sale valuation.
▪ It is also recommended that key management,
particularly if they are not shareholders, are
incentivised with ‘exit bonuses’, both as an
incentive as well as a reward for undergoing a
gruelling sale process on behalf of the
shareholders.
FAILING TO PREPARE CAN BE DETRIMENTAL, AS IT MAY LEAD TO UNEXPECTED
ROAD BUMPS AND DELAYS IN THE SALE PROCESS, OR BUYERS SEEKING THE
OPPORTUNITY TO CHISEL ON VALUE

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WHAT YOU CAN DO
Rather than a number of companies engaging
their own advisors to undertake due diligence on
the company, it is now common for vendors to
prepare ‘vendor due diligence reports’ which will
be distributed to a pool of shortlisted buyers that
will go a long way to speed up the due diligence
process. Examples of these reports include:
▪ Financial due diligence. Review of financial
records to ensure that they are consistent &
accurate, assessing the company’s ‘quality of
earnings’, evaluating the real situation of
assets and liabilities, determining the level of
tax and other financial risks and testing the
reasonableness of the management’s financial
projections.
▪ Financial model and projection. A
comprehensive and defendable ‘budget
forecast’ should be prepared (and
preferably approved by the Board of
Directors). The budget should incorporate a
‘base case’ scenario as well as a scenario
analysis of potential upsides that can be
achieved from growth opportunities.
Management should refrain from making
overly optimistic projections, as this can
impact the credibility of the management,
alienate potential buyers as well as being
detrimental to the proposed deal structures
▪ Legal due diligence. Review of company’s
document to ensure that they are in order,
assessing current contracts for potential
liability issues (such as change of control
clauses), and review of leases to ensure that
the company will have continued access to
properties following the completion of the
acquisition.
▪ Technical due diligence. In preparing for the
sale of ‘specialised assets’, such as wind
farms, water processing plants or prospective
gold mining concessions, where technical
expertise are required to assess the quality,
operating life and value of the asset, it is
recommended that a vendor technical due
diligence report is commissioned. While the
buyers may still see it fit to commission their
own advisors to undertake a detailed technical
due diligence on the asset, having a vendor-
prepared due diligence report will reduce
duplication of work and therefore speed up the
work of the buyers’ advisors.
▪ Environmental due diligence. While
environmental risks may be perceived to be
low, hidden environmental liabilities can be
devastating. As such, certain buyers are more
inclined than others to insist on a thorough
review of all properties and operational sites to
ensure that there are no environmental risks
whatsoever. This report should be
commissioned early to ensure that it does not
become a roadblock to a speedy M&A process.
▪ Prepare VDR. The management, together with
the company’s advisors, should begin
populating the VDR with material documents &
contracts and ensuring the documents are in
order and that the contracts are legally
executed. There may also be certain ‘black
box’ documents (i.e. commercially sensitive
information such as Board papers) that should
be redacted. The un-redacted ‘black box’
documents are only provided to the preferred
bidder during the confirmatory due diligence
stage
Buy-Side Due Diligence
The best way to prepare a company for a sale process is for its advisor to undertake a “buyer’s due
diligence” of the company. By identifying the inherent risks and weak points, the company and its
advisor will be well positioned to take actions to mitigate those risks. ‘Scripts’ and talking points
should also be prepared for management to address anticipated questions
“Large corporates, especially multinationals, are particularly concerned on ‘Environmental Due
Diligence’. This should be addressed early to ensure that it does not become a stumbling block that
delays the process”

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FOCUS ON THE VALUE DRIVERS
While the purpose of the Information Memorandum is to
provide sufficient information to potential buyers to make an
offer to acquire the company, it should be viewed as a market
document with a focus on ‘value drivers’
Information Memorandums (“IM”) can vary in
style and be as long as 300 pages or be as short
as 20. It is usually viewed as a document which
provides a comprehensive and accurate view of
the company, but experienced executives know
that it is a marketing document and view it with
care.
The IM therefore needs to be able to highlight the
company’s key strengths and growth
opportunities, and be sufficiently persuasive to
influence the readers of the document.
While having a well-written IM is good, it is only
but another one of the hundreds of sale
documents which the buyers’ executives may
peruse in a given year. The key messages may be
easily lost within a 100-page written document.
A good advisor therefore knows the importance of
“connecting” with the buyers, and to deliver the
key messages across. One of the most crucial
tasks of the financial advisor is to craft the
corporate story into an “elevator pitch” and instil
“buzz words” that is ultimately adopted by the
buyer’s executives.
For an example, in a recent transaction LCC
adopted a simple pitch where “to this stage the
company has only grown through word of mouth
based on its reputation and quality of its
products, and a corporate acquirer such as
yourself can take the company’s products and
distribute it on a global stage with a more
sophisticated sales channel”.
We know that this “buzzword” worked as the
parties in the process began repeating it back to
us.
Sample Index of an Information Memorandum
Section Content Remarks
1 Introduction An introduction to the company
2 Key Highlights Highlights the strengths of the companies which assist the executives of the buyers to build a
case for acquiring the company
3 Industry Overview Highlights the fundamentals and outlook of the industry, barriers to entry, and recent M&A
transactions
4 Business Overview Description of the company’s history, revenue & business model, business activities and
operating footprint, range of products & services, competitive advantages, competitor analysis,
key clients etc.
6 Growth
Opportunities
This should highlight the management’s growth plans for the company, which may include both
near-term and long-term plans. Growth plans should be credible as cash flow projections will
have a direct impact on valuation
7 Corporate &
Organisational
Structure
This section should is meant to illustrate to the buyer the strength and breadth of the
company’s management, employees, systems and processes. This includes the company’s
fixed assets & properties, branding and intellectual property, details of the company’s back-end
systems (e.g. accounting, IT) as well as risk management systems (e.g. safety culture, quality
accreditation, environmental standards)
8 Financial
Information
Details of the company’s historical and projected financial performance, normalisations,
working capital and balance sheet position
9 Other Information Information that is relevant to be disclosed to potential buyers, including the split of
shareholdings, key risks, preliminary synergy analysis and legal matters

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WHAT IS DUE DILIGENCE?
In a sell-side process, advisors need to distinguish between
those in “deal mode” and those in “research mode”
Simplistically, the ‘bone fide’ due diligence
activities by a buyer focus on 3 simple questions:
“should we buy this company”, “how should we
structure the transaction?” and “how much
should we pay?”
This means that the buyers will comb through the
information that has been given & ensure that the
information is not false, identify risks that can be
destructive to value post-acquisition and to turn
over all stones to ensure that there are no
“skeletons in the close” by asking the right
questions and ensuring all material information
have been disclosed.
It is therefore a matter of knowing “what to look”,
“where to look”, and “what to ask”. Given that a
poor acquisition can be destructive to value, it
should be expected that buyers attempt to be
exhaustive when conducting their due diligence.
However, there are a number of “tyre kickers”,
who can be trade/strategic parties as well as
financial sponsors, who are more interested in
the opportunity to take a close look at the
company and may not have the intention to
submit an offer. These parties should be
identified early in the process and filtered out.
If not, the due diligence process will become more
exhaustive without the potential of achieving a
result, such as when a competitor is merely
looking under the hood of the company, or to
perform a case study on a successful peer. These
exercises can lead to a “field study” for the buyers
to be given the opportunity to learn more about
the company’s operations, where a
disproportional effort is made into assessing a
certain portion of the company’s activities which
does not have a material impact on valuation,
purely to fulfil their curiosity and self-interest.
The methods advisors use to limit the due
diligence activities include setting a “materiality
threshold”, to limit the number of questions that
can be asked, or to provide a time limit to the due
diligence process.
The due diligence process can be classified into
two broad activities: on one hand, to identify any
“red flags” (risks to be mitigated) or “black flags”
(i.e. deal killers), while on the other hand, the
buyers are assessing the future cash earnings
potential of the company (the future cash flows
are discounted at the appropriate discount rate to
determine the valuation of the company).
The buyers will also look at the potential growth
and synergy opportunities, and at the end of the
due diligence process, the buyers will have a view
on the price that they will be willing to pay to
acquire the company
The due diligence process is usually focused on 5
key areas, namely operational, financial
(including tax), legal (including environmental),
technical and industry.
Key to an operational due diligence is whether
there is a cultural fit between the management of
the company and the management of the buyer.
Large corporates are perceived to be bureaucratic
and slow while smaller companies are perceived
to be agile but haphazard. The management
team that is used to working in a small team may
find it difficult to adapt to the corporate culture of
a larger company, and leave.
It is also important for the buyer to ensure that
the key personnel of the company will not leave
the company and start a competing business
following the acquisition, as this will be
detrimental to the operations of the company.
The buyer’s focus is therefore to ensure that the
company they are acquiring will continue to
operate “as usual” following the acquisition, and
that the strategic plans they had laid out can be
achieved.

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USE OF VIRTUAL DATA ROOM
The Q&A Process
In a recent transaction LCC advised on, there
were 4 international parties in the VDR
undertaking their due diligence process.
Together with their respective financial, legal
and other advisors, there were more than 500
questions that were posted and answered
within a 1-month period, allowing for a speedy
conclusion to the transaction.
The Virtual Data Room (“VDR”) environment should be
leveraged to manage the flow of information to potential
buyers, especially if there are more than one party involved in
the sale process
When a company is in a negotiation with one
potential buyer, providing information &
documents, and answering questions, can be a
straightforward exercise.
However, when more than one party is involved,
it is recommended the company begin to
manage the process via a sophisticated VDR
platform.
Confidentiality. One of the main benefits of using
a secure VDR is the ability to restrict the
‘downloading’, ‘saving’ and/or ‘printing’ of
documents. This means that potential buyers are
required to view confidential documents from
their computer screens, and if these parties drop
out from the process, their access to this
confidential information can be quickly
restricted.
Ease of managing access. To manage the due
diligence process, advisors are required to
manage the information flow, including “who
gets what and when”.
Given that the VDR is a centralised platform
where these documents are hosted, access to
documents can be easily managed, and will
provide a birds-eye view of activities across
different parties in the due diligence process.
Tracking of Q&A. Given that potential buyers
(and their advisors) may have a myriad of
questions, these are better managed through
the VDR process, where both the questions &
answers are logged (and the list can be printed
out towards the end of the due diligence
process). Having a centralised platform increase
the ease of tracking the progress of Q&As (such
as which questions are still outstanding) and is
essential when multiple parties & advisors are
involved and the timeframe to respond is short.
Sample VDR Index
Section Documents
1 Transaction documents (e.g. information
memorandum, draft SPA)
2 Corporate Documents & Board Reports
3 Financial Information (e.g. audited
accounts, financial projections)
4 Material Contracts
6 Licenses & Approvals
7 Property, Plant & Equipment
8 Employee Details
9 Trademarks and IP
10 Debtor / Creditors
11 Financial & Insurance
12 Tax
13 Legal Matters
Tracking of activity. The VDR has the ability to
track user activities, including time spent by the
buyers’ advisors in the VDR. This provides the
company and its advisor valuable data on the
parties that are committing time and resources
in the due diligence process, and the parties
who are not.

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BENEFITS OF A WELL-MANAGED
PROCESS
Maximise value. The most obvious benefit of a
slick sale process is achieving a satisfactory sale
valuation and a speedy conclusion. In a recent
transaction LCC advised on, the transaction was
completed within 4 months (from the launch of
the sale process to the signing of definitive
documentation), with LCC negotiating a sale
valuation that was almost twice the initial
expectations of the vendors.
Clear and accurate information, when presented
in a speedy manner, also increases the
perception that the company has good systems in
place and that the Management is organised &
competent.
Pressure on the bidders to engage. Having a well-
run competitive sale process, besides increasing
the tension on price, also increase “FOMO”, the
term investment bankers use to describe the
‘Fear Of Missing Out”. For an example, a buyer
may have ‘lost’ in its bid to acquire a company to
a competitor, and may then be more aggressive
in its bid for a similar company for the fear of
losing again to the same competitor.
Companies or assets that are unique, have strong
business fundamentals, as well as competitive
advantages that are not easily replicable, are
highly sought after by corporate buyers. As such,
they know that their failure to engage may cause
them to lose the opportunity to acquire the
company once it is sold.
Ease of information flow. The due diligence
process involves a substantial flow of information
from the company to potential buyers.
Experienced advisers strategically control the flow
of information, including responses to questions,
to filter out the parties that are in “research
mode” while seeking to solicit deal terms from
those in “deal mode”. A process that is managed
well allows the company and its advisers to track
both the documents as well as the time those
documents have been provided, and to which
party.
Efficient use of Management time. The many
obligations that are placed on Management
include an exhausting Q&A process, multiple
Management Presentations & Site Visits, and
negotiation of the terms of the transaction.
Given that a sale process is a major distraction to
the actual operations of the company (where the
objective is to make profits), LCC has always
sought to minimise the distraction posed by the
sale process on Management.
Representation and warranties. It is the desire
that the due diligence process will eventuate into
an offer, which will include the deal terms as well
as the representations and warranties that are
sought by the potential buyer (or their legal
counsel). These ‘reps & warranties’ are meant to
protect the buyer from any risks that they have
uncovered during the due diligence process, as
well as their reliance on the representations that
have been made by the company and its
Management.
A common practice in M&A is for the documents
that have been made available to the buyer
(through the VDR), as well as the list of Q&As, to
be saved into a ‘USB stick’ that will form the
‘disclosure document’ for the purposes of the
transaction. This will help to prevent any potential
conflict or disagreements in the future, as the
information that has been disclosed to the buyer
can be easily verifiable.
Identification of synergies. The package of
information that is provided can & should be
tailored in a manner that allows potential buyers
to clearly and quickly identify potential synergies
following an acquisition, which may increase their
willingness to pay more. Potential buyers may
also be attempting to identify post-acquisition
integration issues, and the availability of relevant
and reliable information may assist in that
assessment and ultimately eliminate or reduce
such concerns.

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POTENTIAL PITFALLS
A novice approach to a sale process may ultimately result in a
poor outcome, and lead to significant time and resources being
wasted
Before embarking on a sale process, vendors
must be aware that a large percentage of sale
processes will fail to achieve the desired result.
Potential pitfalls include:
Poor preparation
(1) Not ready to sell. Vendors must first be
mentally, psychologically and emotionally
prepared to sell, and pursue it with vigour. A
laissez-faire approach will likely lead to a
suboptimal result.
(2) Not understanding value. Inflated
expectations on value, particularly by
entrepreneurs who believe in the
‘uniqueness’ of their own business, is likely a
one-way street to disappointment. Financial
advisors are able to provide their objective
assessment of value and an indication on the
range of valuation based on comparable M&A
transactions, trading multiples or discounted
cash flow analysis.
(3) Having unrealistic expectations. The journey
will likely be bumpy, and the process taking
longer than expected.
(4) Not having negotiating levers, or having levers
but not using them. Time can both be a friend
or an enemy. It is commonplace for “bottom
feeders” to take their time during the process,
while making excessive demands, and then
making a ‘low ball’ offer with the hope of
acquiring a company for the cheap once the
everyone is exhausted from the process.
(5) Not understanding the amount of work
required, such as the extent of the buyer’s
due diligence requirements.
(6) Being passive, such as failing to a develop
strategic approach to the process or not
having a “fall back” plan. Wishing and hoping
is not a plan.
Deal structure
(1) Structure. Due diligence may uncover risks
that “necessitate” buyers to demand deal
terms that are unfavourable to the vendors.
Knowing when, where and how to push back
is critical.
(2) Poor earn-out structures. Accepting earn-out
structures, especially when its impact is not
properly understood, can lead to disputes in
the future when earn-out hurdles are not met.
Failure to conduct reverse due diligence
M&A is a form of marriage (or speed dating) for
corporates, and while buyers conduct their due
diligence on the company, many vendors fail to
conduct due diligence on the buyers. Among the
aspects that the vendors must consider include:
▪ Capacity to pay. Everyone will like to have a
look, but not everyone will have the money to
pay.
▪ Willingness to pay. While buyers may have the
money in the bank, it might not be their
strategy to make acquisitions. Analysing the
buyers’ track record in M&As, as well as their
motivation in participating in the process, is
therefore an important exercise. Avoid
becoming the subject of a research thesis by a
competitor.
▪ Cultural fit. If the Management (or the vendors)
are expected to stay on in the company
following the acquisition, the failure to
understand the cultural fit can lead to future
arguments & disputes. Key employees,
customers and suppliers may leave, leading to
the destruction of value. These may impact the
future performance of the company and
therefore the earn-out or deferred payments.

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RIGOROUSLY PROMOTE THE
CASE FOR SYNERGY
Valuation is an art, not a science
Illustration of Value
Standalone Value of the Company
(to current shareholders)
Value of Synergies
(in the hands of a buyer)
The minimum valuation
the vendors should
accept is the standalone
value of the company
The maximum valuation the
buyer should be prepared to pay
is equal to the standalone value
of the company plus the value of
perceived synergies
The potential synergies will be
different for each buyer, with
financial sponsors having little or
no ability to derive synergies
from an acquisition
Anything above this means
that the buyer is sharing the
benefits of potential
synergies with the vendors
The ability for the company to
generate additional cash flows when
it is in the hands of the new owners
While different buyers will have different
approaches to valuation, the most common and
accepted approach is the discounted cash flow
model.
Simplistically, a buyer will make assumptions
about the cash generation capability of the
business, and then discount the future cash flows
at an appropriate discount rate to arrive at the
valuation of the business today.
However, the valuation of the business to the
current shareholders and to the potential buyers
will differ, as the buyers may have the ability to
derive synergies once they become the owner of
the company.
These synergies include cost synergies, such as
when the company’s head office employees are
reduced given the duplication in functions, as well
as revenue synergies, where the company’s
products can be distributed through the buyer’s
established sales channels.
As such, the company’s future cash generation
capability may be higher in the hands of the
buyers than in the ownership of the current
shareholders. This difference in value, as
illustrated below, highlights the importance of
analysing and making a case for potential
synergies to the buyers.
While sophisticated buyers may decide to keep
these synergy ‘upsides’ to themselves, they may
be more inclined to share a portion of these
perceived upsides to the vendor in a competitive
sale process. Given that other potential buyers
will also be able to benefit from these synergies,
the buyer that is willing to share the most synergy
upsides with the vendor, and making the highest
bid, will likely emerge as the winner of the
contest.
Value of potential
synergies created
from a business
combination

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CONCLUSION
Managing the due diligence process can be
challenging. While Warren Buffet may seal a deal
over a handshake, most buyers conduct extensive
due diligence prior to agreeing on terms and
valuation. This process can be time consuming
and exhausting, and will consume valuable
resources that are better allocated towards the
operations of the business.
Moreover, towards the end of the process, there
is no certainty that an offer will eventuate or that
a deal will be consummated. A failed sale process
can be dispiriting for entrepreneurs, especially
when significant resources have been consumed
in such an exercise.
Just like having tax advisers to manage tax
returns and lawyers to manage contractual
disputes, appointing a financial advisor to
manage the sale process is the right option for
entrepreneurs to secure the best possible
outcome.
Experience matters. While the company’s
executives may be experts in their own fields, it is
unlikely that they have the experience, nor the
time, to execute an M&A process. Appointing a
financial advisor to provide the right leadership
will go a long way in ensuring a smooth process.
Financial advisors are also incentivised to achieve
the highest sale valuation possible, and given
that selling a business may be the single, most
significant decision entrepreneurs can make in
their career, it is only right that they seek expert
advice.
Poorly run processes will likely lead to suboptimal
results, which is a disservice to the shareholders
of the business.
A compelling story. While having a compelling
business case may increase the attractiveness of
the company to potential buyers, different buyers
will have different perceptions on the key
attributes of the company. For an example, one
potential acquirer may be interested in expanding
its geographic reach, while another may be
seeking to expand its product lines.
As such, analysing the strategic priorities of the
potential buyers, and then being able to craft the
right story for each of them, is essential to
effectively influence the executives of potential
buyers.
“Deal champions” within large organisations have
the ability to navigate the corporate’s internal
machinations to deliver a compelling offer for the
vendors if the target company is the missing
puzzle that will help the buyer’s C-suite achieve
their strategic vision. Bidding wars emerge when
a company becomes a “must have” asset, and
experienced financial advisors know how to find
the right lever to pull and the right buttons to
push.

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SDR’s
Picture
AUTHOR
Simon Koay is an Associate Director at LCC Asia Pacific, a
boutique investment banking firm and strategic advisory
practice, based in Sydney, Australia and working across the
Australasian and EMEA regions.
Visit www.lccasiapacific.com to learn more about LCC Asia
Pacific.
Simon can be contacted by email on sxk@lccapac.com.

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