Chapter Four. Due Diligence: Think Like the Pros

Identifying key issues and possible deal breakers at the beginning of due diligence can increase the likelihood of completing the transaction successfully. Due diligence is designed to identify potential transaction risks—market, financial, tax, operations, real estate, and technology.

Since the mid-1990s, a new concept has arisen, referred to as reverse due diligence. The goal of reverse due diligence is to keep a company that is selling a business unit or division from having numerous teams from potential buyers combing individually through its records to do their own due diligence.

In the past, whenever a company sold a division or a business unit, it would prepare a “book” telling what is for sale. This offering book is not a business plan per se; rather, it is a comprehensive document describing the purchase opportunity in great detail. It might even include possible synergies available to a buyer, backlog information, major customers, and so on.

Each potential buyer would perform due diligence and investigate the information to ascertain any issues that may be relevant. The offering “book” typically puts the best light on the business. It is enthusiastic about the opportunity. It is not misleading, but it just emphasizes the opportunity. There is little in the way of objective standards for constructing such an offering “book.”

Due diligence is an attempt to analyze the purchase opportunity and see if it fits with a potential buyer’s ...

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