Selling Your Company: Reverse Due Diligence in M&A

You’ve built a successful business and now you’re ready to sell your company. You’re prepared to grind through due diligence with a private equity firm. But, who is the private equity firm? (Not their name.) Who are they? As a firm? As people? What’s their corporate culture? How will they behave late in the transaction when the stakes are high? What will life be like for your team in the years ahead?

Montage Partners has closed 20 transactions, including 12 as buyer¹. Nine of those 12 transactions involved a founder seeking partial liquidity or selling their company in whole. To be sure, this is a major life event.

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. You would be wise to do so. Ask the private equity firm 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.

Reverse due diligence played an important role when Pejman Kalkhoran, a founding shareholder of Lake Forest, California-based Boundary Devices, a high-growth designer and manufacturer of embedded computing solutions, was evaluating capital partners. According to Pejman, “I wanted to make sure that we wouldn’t be micro-managed once the transaction closed. This is something that is difficult to know when just communicating directly with the investor because all investors say they will not micro-manage. Until you work with someone for a period of time, you won’t know the answer to this so really the only way to get the answer is to review with current or former partners. Second, we wanted to understand the value that Montage Partners brings to the table. This is different for each company, but the references that we spoke to had similar points which reinforced our beliefs. The reference calls validated our expectations.

Ideally, you should make the reference calls prior to completion of legal documentation. 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.

Mike Friend, founder of Tempe, Arizona-based Integrity Mold, a leading manufacturer of highly-engineered, tight-tolerance plastic components has successfully navigated through three sale processes. According to Mike, “On the sell-side, you’ve got to be in synch with the buyer. You’ve got to get to know the buyer, so you can look on the other side of the transaction and talk about goals and strategies. The more you get to know the buyer, the better.”

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.

¹ The other eight transactions were seven successful exits and one portfolio company strategic merger with a competitor.

About Montage Partners
Founded in 2004 and located in Scottsdale, Arizona, Montage Partners is a private equity firm that invests in established companies in the western U.S. with EBITDA between $1 million and $5 million. Above all other investment criteria, Montage Partners invests in exceptional people. Montage Partners provides liquidity to those who have spent years of their life building great companies, Montage Partners protects those companies through a transition of ownership and Montage Partners supports the next generation of a company’s leadership in executing on growth initiatives. For more information, please visit www.montagepartners.com.