What Does Reverse Due Diligence Mean?
Reverse due diligence can also be called vendor due diligence, sell-side due diligence or seller due diligence. It refers to when a company performs 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/investors/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 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 acquirer's balance sheet and the strategic plans for the target post-acquisition.
