Vendor and reverse due diligence: Opportunities and advantages

Preparing your business for sale

Once a business owner has made the decision to exit their business, they should treat that decision just like any other strategic initiative. They need to identify concrete goals and objectives, outline the strategy designed to meet those goals and objectives, and implement the various tactics that are needed to support the strategy.

In addition to the obvious issues of identifying the goals, such as what is the acceptable purchase price and structure, legacy issues, care of loyal employees, etc., the seller needs to identify his internal and external support team and objectively assess the current condition of the company. Unfortunately, this last issue is frequently overlooked and without question weakens the seller’s negotiation position, which could cost them in terms of a favorable price and structure. However, ownership can address the issue of preparedness though reverse or vendor due diligence, that is, having a third party assess the company the same way a buyer would, prior to taking the company to market. The difference between vendor due diligence and reverse due diligence is that in vendor due diligence the results are presented in a report that is provided to prospective buyers where in reverse due diligence the results are kept confidential by the seller.

A comprehensive vendor or reverse due diligence will include a quality of earnings, quality of assets, tax due diligence, commercial due diligence (especially if the future revenue stream of the company is critical to the sale), and operational (if the operations are proprietary or otherwise critical to the value of the company). This will allow the seller to prepare for the issues that frequently arise in the sale process. While this article discusses the advantages of vendor and reverse due diligence related to preparation for a near-term sale of a business, due diligence could also be performed well ahead of a sale process to provide owners the appropriate amount of time to correct or modify any identified concerns prior to an exit.

Vendor or reverse due diligence provides the following advantages to the seller and their investment banker.

• Provides the seller an opportunity to fully explain issues or circumstances that could be perceived as flaws of the company by prospective buyers
• Assists the seller in preparing for the questions and document requests that are invariably part of the buyers vetting of the company