How & What About Reverse Due diligence
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How & What About Reverse Due diligence – related are, vendor due diligence, reverse due diligence procedures, methods and business net-worth. The accounting, taxation, financial and economic implications.
Just as any prospective buyer will need to perform due diligence on the business he intents buying, so should the seller or vendor conduct that same due diligence on his business. It is called Reverse Due Diligence or Vendor Due Diligence.
What does the businessman understand by Reverse Due Diligence?
In fact,Reverse Due Diligence defines the conscious efforts made by the seller in determining the real value of his property before selling it. In doing this, the seller would like to clear some doubts and make way for good reasoning for the sale. Reverse due diligence allows the seller to prepare for issues that frequently arise in the sale process.
How & What About Reverse Due diligence
How does the businessman go about this?
Therefore, he would like to do the following:
Review of the financials: He must review his financials. This include the review of the earnings capacity, its profitability, cash flow records, balance sheet, and profit and loss account details for at least a period of three years.
Current Assets Valuation: Th seller should be able to know the value of the inventories subject to the method of valuation. Others are account receivables and prepayments etc. These are all easily convertible to cash. The seller should note their value.
Fixed Assets Valuation: The seller should be able to know the true value of the assets like Plant and Machinery, land and building, considering their age and technological influences on them. He should look at their insurance coverage , premium paid and claims already made on them. He should consider those that are under pledges, leases and hire purchases. A lot need to be done here considering that these assets are no longer new and may not even fetch their current book value when sold.
How & What About Reverse Due diligence
Liabilities: Liabilities are normally in two classes; short term and long term liabilities. Issues of accounts payable, Debenture holders, leases, hire purchases instalments due, collateral, contingent liabilities, unpaid tax liabilities etc. are to be considered.
Equity: There are always ordinary shareholders – share valuation is important here. Other issues like unpaid dividends, retained income (reserves), preference shareholder interests, will also be considered.
Who then is at the cross road?
This article is a highlight of what reverse due diligence involves. There are still a lot that could be done in this process by the seller so as to be ready to sell. It could be that realities on ground could make the seller change his mind from selling, especially, if in a merger his position may be compromised in such a way that he may just become ordinary share holder. A lot of merger arrangements may make the seller decide to continue to manage his outfit instead. But in most cases an independent valuer could be involved, yet it will be left for the two parties ( buyer and seller) to make their decisions independently.
How & What About Reverse Due diligence
What are the advantages of conducting reverse due diligence? or who gains or looses?
Conducting reverse due diligence will give sellers the following advantages:
1. An opportunity for the seller to explain issues that could be perceived negatively by prospective buyers.
2. He get ready to answer buyers questions.
3. Provides the investment banker with verified data to include in the Confidential
Memorandum
4. Iron out potential kinks, thereby keeping a prospective purchaser in the process longer.
5. If done in advance it enables the seller to make necessary corrections,
6. It gives the seller ground for good negotiation,
7 .If reverse due diligence is thoroughly done, it can help minimise the period of negotiation.
8. The seller now has an updated information about his entity, even if the sell never worked.
How & What About Reverse Due diligence
This aspect of business life is a technical one meant for professionals only. Get a consultant.
Deacon Anekperechi Nworgu, a seasoned economist who transitioned into a chartered accountant, auditor, tax practitioner, and business consultant, brings with him a wealth of industry expertise spanning over 37 years.
