Reverse due diligence, from the perspective of internal due diligence of the seller before a divestiture, would consist of monitoring the existing state of assets, quality of earnings, tax due diligence, operational due diligence and commercial due diligence.
This allows you to dig deep into your own organisation as if you were the buyer. It is significant to consider this action as though you are the purchaser and if you are preparing your business for sale and wish to enhance its value. This ‘self-assessment’ is usually performed by a third-party on behalf of the company and provides a holistic yet unbiased landscape of various aspects like financial position, technology infrastructure, and operational capabilities, to name a few.
Why Reverse Due Diligence?
Most business owners invest a major portion of their life in setting up their business and often overlook petty issues that can make a lot of difference between a sale, or a contract that’s been rejected or cancelled, and renegotiations for a lower deal. Here’s where reverse due diligence procedure can play a pivotal role in rectifying and objectively assessing critical areas before listing the practice for sale. It also acts as a business health checker to view the entire practice, right from the staff’s performance, client retention, quality of assets, and other aspects of the practice.
Reverse due diligence is a chance for business owners to do their homework by considering how well the business fits in with their current operations. Reverse due diligence provides the following benefits to the sellers as well as the potential investors:
1) Reverse due diligence provides the business owner’s/seller an opportunity to wisely project issues and circumstances that could otherwise be perceived as flaws of the company by potential investors
2) Despite being close to the business, there are certain areas that the business owners are not aware of. Performing an internal assessment will only ensure re-working on the areas that need attention before a sale. This helps to identify and alleviate the potential risk, thereby improving the business valuation
3) It assists the seller beforehand in preparing for the questions and document requests by the potential investors that are invariably a part of the investors’ selection process of the company
4) If the reverse due diligence is comprehensive enough, it can help in minimising the exclusivity period as the investor needs to only roll forward the data needed to authorise their investment thesis
5) Eliminates the potential risk of surprises from the buyer’s due diligence
Significance of conducting Reverse Due Diligence
Performing Reverse due diligence at an early stage provides you with a chance of improving your practices and increase your negotiating power.
No doubt that once you have entered into a contract, the investor would still want to conduct their due diligence. But with this activity performed by an advisory service expert, you can be rest assured since you’ve covered all the aspects to avoid encountering any surprises that could cause a loss of sale.
Reverse due diligence would only ensure that as a seller, you identify the true value, whilst creating complete transparency. This eventually eliminates the possibility of surprises and uncertainty, invariably making your sales transaction process seamless.