Why Reverse Due Diligence is Important for Sellers

Chances are that when you hire for a key position you perform reference calls before bringing a person onto the team. It’s surprising, however, that few sellers of companies perform reference calls on private equity firm buyers during due diligence. We actively encourage you to do so. Ask your potential buyer for two to four people to speak with. This could include a combination of founders of other companies that the private equity firm has invested in and management teams that have run companies in partnership with the private equity firm.

Ask the references what the firm is like when things are going well and when things aren’t going well. Ask how they worked through differences during negotiation of legal documentation. Ask if the private equity firm tried to re-negotiate the purchase price. Ask about performance post-closing and how the private equity firm has contributed. You’re selling your company and making a major life decision; ask whatever you want. The important point is to ask.

Ideally, you should make the reference calls prior to completion of legal documentation, typically during the post-LOI due diligence phase. This may save you time, money, and lost sleep in the event that the reference calls yield warnings from those who have been down the road before.

At Montage Partners, we take seriously the evaluation of who we work with. We encourage sellers and management teams to do the same with us. We value long-term relationships (long after the transaction is closed). Unfortunately, this emphasis on long-term relationships isn’t shared by everyone. So, don’t take it for granted. Ask for references. Get to know your buyer – with the help of those who’ve been down the road with them before.