How to do Reverse Due Diligence on your buyers

If you ask any seller who has completed an M&A deal about the hardest part of the deal, most will say: Due diligence...

You get put through the ringer. Lawyers, accountants and the buyer's team crawl over every part of your business looking for flaws, risks or weaknesses.

Did you know that you should turn the tables? You can ask similar questions to the buyer. We call this Reverse Due Diligence.

Why?

One of the most important factors in your company sale is the quality of your buyer.

A good buyer has a clear strategy to buy you, urgency to buy now, funds available, a clear plan to integrate you and you are aligned on values.

If you find that buyer, you have a really good chance of the deal completing on good terms.

We've broken the top factors that make your perfect buyer in detail in 10 traits that make the perfect buyer.

Some of these factors are easy to evaluate from a distance or with some quick research, or will come out naturally in your discussions. But others require you to proactively ask the buyer.

Confident and empowered sellers will run through Reverse Due Diligence, to evaluate the buyer. That will give you a clear view on whether they are a good fit for you, and worth pursuing further. It weeds out any time-wasters or those who are very unlikely to make you a great offer.

There's extra benefits too. Asking smart questions signals that you are clued-up and professional. It also gives a subtle signal that you might have other options and that the buyer will need to work hard to win the deal. That's a nice way to signal a strong BATNA at the start of negotiations.

Let's explore the questions you should ask in Reverse Due Diligence, and how and when to ask.

Questions to ask a buyer

These questions mirror the list in 10 traits that make the perfect buyer. If you haven't already, check out that article first.

Strategic rationale

• Could you explain why are you interested in buying us?
• What is your company's medium-term strategy?
• How does this acquisition align with that strategy? What role would our company play in delivering your strategy?

Ideally you would dive into the nuances around their strategy and your role within that, to get a more detailed understanding of the rationale for the deal. Some buyers may not want to share too much of their internal strategy with you however.

Timing

• When would you like to get this deal done by? Is there a specific timeline or deadline you are working towards?
• For a deal such as this, how long would you typically expect to need between signing an LOI and signing the definitive agreements?
• Do you have advisers appointed already, or would you do that later in the process?

Senior support

• Is your CEO / Board supportive of your discussions with us? Which senior stakeholders within your organisation are supporting the deal?
• Can you describe the internal approvals process you would go through for this deal to proceed?
• Who in your team will be leading the deal process?

Experience in M&A

• How many acquisitions have you completed in the past, and can you share an example of a recent deal with similar characteristics to this?

Funding

• If the deal was to proceed, how would the purchase price be funded? Do you expect to do that from cash reserves or from new financing?

Integration

• Have you considered your integration plan for our company? How will you approach staffing, systems, and operational changes?
• What do you view as the main opportunities for collaboration between us?
• What are the biggest challenges you foresee in integration, and how will they be addressed?

Reputation

• Could you provide references from sellers or partners involved in your past acquisitions?

Completion Risk

• Are there any regulatory or other external approvals required to close this deal?
• Have you considered whether there could be any anti-trust approvals needed?
• Do you expect a What contingencies have you prepared to ensure the deal closes on schedule?

Vision

• How do you envision the future of our business within your organization?
• How would you describe your company’s culture and management style?
• How do you plan to engage with and retain our team post-acquisition?

Growth

• What opportunities for growth do you foresee, such as new markets or product expansions?

When to ask

The due diligence that your buyer conducts on you will be very structured, detailed and lead by advisors.

You should take a more informal approach, and explore these areas softly as you are getting to know the buyer and starting to scope out the shape of a deal.

You need to strike a balance. Don't wait until too late in the process, as you might get information which you wished you knew earlier. And don't hit them with 50 questions in the first meeting either.

In early discussions, focus on exploring their motivations for the deal, how you might fit with their strategy, timings and their history in M&A.

Then as the negotiations deepen, you can start to explore the integration aspects of the deal and ask them about funding and senior support too. Then it might be appropriate to ask for some references.

If you expect your deal to have an earn-out or deferred compensation, you can ask about their vision and plans for the business too.

How to ask

You are entitled to ask these questions, and it's a signal of a prepared and confident seller.

There are some buyers who might be slightly put off by having the script flipped back at them.

But if you approach this with curiosity, not scrutiny, you will be fine.

The best way to frame it could be:

This company is very precious to me, and it really matters that we find the best partner. I'd love to ask a few questions to check that we’re the right fit for each other, and to understand more about you, your plans for us, and how we could work together.

Remember to use a collaborative tone. M&A is a team sport, after all.