Reverse Due Diligence
Definition - What does Reverse Due Diligence mean?
Reverse due diligence can also be called vendor due diligence, sell-side due diligence or seller due diligience. It refers to when a company perform due diligence on itself to assess the company's readiness for sale before being presented to prospective buyers. This 'self' due diligence is usually performed by a third party on behalf of the company.
Reverse due diligence can also refer to when a seller performs an analysis of a potential buyer to assess their ability to close the transaction and if they are suitable partners/investor/buyers. Just as potential buyers conduct careful evaluations of a selling firm and a target company's operations, selling firms also initiate due diligence for potential buyers and offers.
Divestopedia explains Reverse Due Diligence
Reverse due diligence, in the context of internal due diligence of the seller prior to a divestiture, would include quality of earnings, quality of assets, tax due diligence, commercial due diligence and operational due diligence. Vendor due diligence usually will not reduce the due diligence requirements or procedures of a prospective buyer. It may however, increase the efficiency of the buyer's due diligence if all information required is organized, and more easily accessible.
Reverse due diligence, in the alternative context, is used to assist the selling firm in making strategic and informed decisions regarding the selection of prospective buyers, partners or investors. Reverse due diligence is important in situations when a seller is retaining a portion of the its equity or receiving contingent or share consideration as part of the purchase price. In the context of due diligence on a would-be acquirer, the selling company would assess the strength of the acquirers balance sheet and the strategic plans for the target post acquisition.
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