Industry Insights

Preparing a Company for Sale Using Reverse Due Diligence

November 2011

In the current economic climate, potential buyers are willing to search longer and harder to identify the best acquisition candidate. As a result, transparent financial and operating information is more important than ever. Sell-side, or reverse, due diligence involves hiring a third-party due diligence expert to conduct a dry run diligence assessment. This can identify and quantify issues and exposures that could adversely affect a deal.

Areas of focus with respect to financial statement sell-side due diligence include pro forma earnings before interest, taxes, depreciation and amortization (EBITDA) and net working capital. To reduce the likelihood of purchase price disputes, sellers should be sure EBITDA add-backs are reasonable and justifiably supported through proper documentation. In addition, target net working capital is another area commonly disputed during transaction negotiations unless clearly defined early in the process. Purchase agreements frequently define closing net working capital computations as consistently applied and in accordance with generally accepted accounting principles (GAAP). Costly disputes can easily arise when a company consistently applies certain accounting policies not in accordance with GAAP, particularly at interim period ends. Sell-side due diligence can identify GAAP departures early to be sure net working capital computations are clearly defined in the letter of intent and purchase agreement.

In summary, sell-side due diligence provides companies with an objective third-party view of the buyer’s perspective. Unwanted surprises uncovered during buy-side due diligence often result in downward purchase price negotiations, lower valuation multiples or scaring off lenders or potential buyers. The sell-side due diligence process will assist companies in resolving or managing these issues before potential buyers discover the problems on their own.

For more information on reverse due diligence, contact your BKD advisor or .