Reverse Due Diligence: Is it Necessary with a Private Equity Buyer?

We estimate there are thousands of private equity firms in the United States. Some invest their own capital. Others are institutional investors who raise and invest equity funds from large companies, universities, pensions, family trusts, and a multitude of other types of investors. Their investment strategies vary greatly so conducting reverse due diligence is critical if you are contemplating selling your business to a private equity buyer and want to find the best fit for you and your company.

We suggest you get answers to the following critical questions early during reverse due diligence before you share confidential information or make any commitments:

  • What interests you the most about the industry that we service?
  • What concerns do you have about our market?
  • Has your firm invested in our industry previously?

Many private equity firms are industry agnostic, meaning they will invest in most market segments if they match their financial requirements. If you are looking for a “value-add” investor, confirm the private equity firm has extensive (not superficial) knowledge of, and strong relationships within, your industry so they are able to provide you with strategic direction, leads on new client opportunities, technology support, or operational resources.

  • In addition to capital, what else does your firm provide to companies that you acquire?
  • Does your firm charge management fees for these services?
Some private equity firms provide more than financial support. They may source acquisition candidates, help identify and win new client engagements, fill gaps within your leadership team, or provide offshore capabilities. Make sure your investor can demonstrate the non-capital value they can provide to a business like yours.
  • What is your “sweet spot?”
  • Do you already have your cashflow lenders lined up?

In your initial call, and before providing any confidential information, ask the private equity firm to describe how they typically transact. They should be prepared to tell you how much they plan to invest in your company, the percentage of ownership they require, and whether they will need lender financing. Most private equity firms will leverage the company they purchase with debt financing. Make sure their lenders are experienced investing into your industry.    

  • Can I speak to one or a few owners who you transacted with?

There is no better way to learn about your private equity suitor than by having one-on-one conversations with the owners of businesses they completed a transaction with. If they resist, this is a huge red flag. 

If you are contemplating selling your business to a private equity firm, it is critical to find the right one whose investment criteria aligns with your goals and conducting reverse due diligence will help.