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This article was featured in Pitchbook's 2024 Q3 European PE Breakdown report.
Sell-Side Due Diligence — Harnessing the Best of North American and European Approaches
Over the past two decades, the landscape of commercial sell-side support in private equity transactions has evolved significantly, giving rise to a sophisticated array of strategies tailored to the unique dynamics of each deal. These approaches have been shaped by factors such as transaction type, deal size, and the varying levels of sophistication of both buyers and sellers.
The spectrum of outputs is wide-ranging, from streamlined market sizing and customer referencing exercises—which shift the bulk of the due-diligence responsibility onto the buyers—to exhaustive, 400-page vendor due-diligence reports that place greater emphasis on educating the market and showcasing the asset’s narrative through the lens of the seller and its management team. Over the past five years, Stax has seen sell-side diligence average fees increase around 8% to 10% per year, largely due to growing demand for robust scopes and deliverables.
Divergent Paths: North American versus European approaches
This evolution is further distinguished by the divergent paths taken by North America and Europe in developing these methodologies. The distinct approaches have been increasingly apparent as cross-border transactions proliferate, exposing European assets to the rigorous demands of North American funds, and vice versa. This transatlantic interplay has underscored the need for a nuanced understanding of regional differences in deal execution and has highlighted the importance of tailored due-diligence processes that can bridge these gaps and cater to the specific needs of global investors.
Action-oriented approach: Focusing on value-adding due diligence
As a global strategy consulting firm specializing in private equity, Stax uses its extensive transatlantic experience and buy/sell-side expertise to deliver a highly effective, action-oriented sell-side approach. We maximise value-adding components of vendor due diligence while delegating routine tasks to lower-cost sources and AI solutions. Starting with a buy-side mindset, we anticipate key buyer questions, with market size, dynamics, and growth—both historical and forecasted—set as baseline expectations.
We have discovered that the most effective and impactful approach focuses on strategic enquiries: How does the asset’s value proposition stand out against competitors? What drives the sustainability of its margins? Where are the specific opportunities for value creation? These insights are integral to a thorough analysis of the business plan’s feasibility, ensuring that our clients are equipped not just with data, but with the actionable intelligence and insight that directly aligns with the priorities of discerning buyers in today’s private equity landscape.
This targeted approach is especially crucial for tech and software assets, where Information Memorandums often depict a vast, untapped market. For an asset with $50 million in revenue, the difference between a total addressable market of $6 billion or $7 billion is negligible. What truly matters to discerning investors is understanding the asset’s unique differentiators and go-to-market strategy—key drivers of capturing market share at an attractive price and margin.
Preparing for a successful exit: Strategic collaboration and analysis
This focused, compelling narrative enhances the asset’s appeal to buyers while offering significant benefits to the management team in terms of exit planning. It refines the growth strategy to target key customer segments and market opportunities in a controlled setting, away from the high-pressure, time-constrained deal environment. This allows management to stay focused on running the business, minimising distractions while strategically positioning the asset for a successful exit.
The approach is built on three fundamental pillars, with each designed to align with the rigorous demands of private equity investors and maximise the asset’s attractiveness in the market:
- Strategic collaboration with management: Advisors should work closely with the management team to ensure they are fully equipped to address the critical questions that buyers will pose. This involves not only preparing them with robust data but also crafting compelling presentation materials that clearly articulate the asset’s value proposition and strategic positioning.
- Rigorous analytical framework: The methodology is underpinned by a deep data-driven analysis of market sizing, sales and customer trends, and customer behaviour over time. This includes detailed assessments of pipeline performance and win/loss analysis, providing insights into the asset’s competitive standing and its potential for sustained growth.
- Efficient market outreach and intelligence gathering: The market outreach programme should be highly efficient, integrating primary research—such as customer and expert interviews and surveys—with analysis of secondary research data. Leveraging a combination of AI tools and the expertise of our Sri Lankan operations team, we deliver actionable insights quickly and cost-effectively.
This comprehensive, three-pronged approach not only enhances the asset’s market readiness but also ensures that the management team is well prepared and that the value of the asset is clearly communicated to potential buyers, thereby increasing the likelihood of a successful transaction.
Leveraging environmental, social, and governance (ESG) as a value driver in investor materials
A crucial enhancement to our approach and capability set is the incorporation of ESG analysis and readiness into investor-facing materials. While ESG preparedness is a more common and accepted element of the process in the European market, we are witnessing an increasing interest in this area within the US market as well. However, as Anuj A. Shah, Head of ESG & Impact Advisory at Stax, has observed, the mainstream ESG narratives in the US and Europe have increasingly diverged over the past year.
In the US, the politicisation of ESG has shifted the conversation from merely identifying and reporting ESG factors to a more focused examination of how these elements contribute to value creation and EBITDA improvement. Shah advises management teams globally to take proactive control of their ESG narrative by clearly demonstrating the linkage between material ESG factors, financial performance, and an actionable sustainability strategy designed to capture value.
Embedding ESG analysis into our investor-facing materials aligns with evolving US and European market expectations and empowers management to link ESG initiatives directly to financial outcomes. This strategic approach ensures that the asset’s ESG narrative is not only robust but also positioned as a driver of value creation in the eyes of potential investors.
Open-ended exit preparation: Aligning strategy with market demands
Beyond simply generating the facts necessary to inform potential buyers, we have found that the true value in sell-side market work lies in preparing businesses and management teams for the exit or capital-raise process, rather than focusing solely on the creation of the investor-facing materials.
At Stax, we have observed the growing trend where our work is primarily geared towards shaping how an asset should position itself for buyers, and identifying the strategic steps required to bridge the gap between its current state and its optimal market position.
This shift is partly a byproduct of the challenging market conditions of the past 12 to 24 months, which have created more sceptical investors and a discerning investment environment. Investors and investment committees are now scrutinising opportunities more closely, making it essential for management teams to be fully prepared to address buy-side questions—both those which are known to them pre-process and those which emerge from our in-depth research.
Successful exits we have advised on during this period consistently feature management teams that are not only well prepared to respond to these critical enquiries but are also agile in adjusting strategic priorities as needed. This flexibility is crucial; increasingly, sponsors and management teams are treating exit preparation work as an open-ended process, where the timing of the sale or capital raise is determined by insights gained through these studies. This approach often overlaps with our value creation work, allowing for a more nuanced and strategic positioning that aligns with market demands and maximises value at the point of engagement with potential buyers.
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