Due diligence is an inevitable facet of any merger or acquisition, and companies considering a sale must take a long, hard look at the business before propositioning any prospective buyers. The best way to ensure that there are no surprises during the future buyer’s due diligence investigation is by engaging in reverse due diligence, also known as sell-side due diligence. This is just a due diligence investigation that takes place and has far less at stake before the real due diligence process begins. Here are the top tips for performing reverse due diligence:
Think Like a Buyer
To engage in an adequate reverse due diligence investigation, the leadership team that is contemplating a sale of the business must first begin to think like a prospective buyer. Far too often, company leaders have an overly rosy view of their business and are convinced that they are worthy of a top dollar sales price. Although this may seem like the case on the surface, the due diligence investigation that occurs during a sale often proves otherwise. As a result, the leadership team has to take a gigantic step back and really assess whether they would be interested in pursuing a purchase if they were in fact the potential buyers. By putting themselves on the other side of the equation, leaders may begin to realize that things are not as amazing as they appear on paper.
Hire Tough Evaluators
In addition to conducting a painstaking assessment of the company’s operational and financial efficiency, or lack thereof, it is likely best to hire some tough evaluators who will examine the available information and provide a neutral report on how things are faring. This means recruiting independent analysts, most often a team of lawyers and accountants, who will meticulously comb through the company’s records and documentation to determine whether there is anything amiss. In most instances, any prospective buyer will unleash their own team of experts during the due diligence investigation, and those folks will be looking for anything and everything that may be a red flag. Thus, it makes more sense to figure out what needs to be fixed before moving forward to reduce the likelihood of an unwelcome surprise or end up spending time on a deal that falls apart completely.
Reverse due diligence may end up bringing some painful realities to light, but companies have to analyze the information presented in an objective fashion and use the opportunity to rectify those issues immediately. During the actual due diligence phase, it will be a lot harder to convince the other side to overlook the problems identified. Fortunately, by engaging in reverse due diligence, companies are far more likely to avoid the embarrassment associated with the unearthing of negative information, provided that they are willing to view that which is presented impartially and implement the corrective action needed.
Correct and Repeat
Simply going through the motions of a reverse due diligence investigation without taking any remedial measures will not suffice. The process must be used to effectuate real change, and once the necessary changes have been made, it will be beneficial to repeat the reverse due diligence cycle. Obviously, the second go around can be a condensed version of the initial investigation, but taking another look at things once they have been fixed will help highlight whether the company is ready for the real thing.