Articles

Private Company M&A - Reverse Diligence: Questions Sellers Should Ask of Bidders

Date: July 1, 2025
This article is part of a continuing series by Frank Jones outlining recurring issues of critical importance to sellers in private company M&A. Previous topics include Equity Rolls, Net Working Capital Purchase Price Adjustments, Indemnification Clauses and Claims, Rep & Warranty Insurance and Earn-Outs. 

When selling a private company, Sellers understandably focus on providing bidders with a comprehensive data room packed with detailed documents and information about every aspect of their business. They expect bidders to pore over the materials and come to the table armed with a long list of due diligence follow-ups and other questions. Yet, in the grand sweep (and sometimes diligence fog) of an M&A deal, Sellers often overlook the critical importance of proactively asking and receiving answers to their own questions. Before committing to a specific bidder through a Letter of Intent or other exclusivity arrangement, Sellers should receive answers to the right questions to ensure that their goals align with the Buyer’s priorities.
 
There are many bidders who want to buy businesses. Many are sincere, reliable and capable, while others are not. Sellers considering a sale should be discerning, make fine judgments, and be able to tell the difference between the two. Asking the right questions upfront not only allows Sellers to identify genuine bidders, it paves the way for a better deal and a smoother and more certain closing, while also helping secure the best long-term fit for the business and its future.
 
There is no one list, correct sequence or right way to conduct this form of “reverse diligence.” Assuming there is basic agreement on price and other key deal terms, some of the key questions to ask include both “big picture” business questions that go to the heart of the underlying rationale for pursuing a sale (typically posed before or at the time of the management presentations) and more specific and detailed questions about the structure and terms of an actual deal (typically posed no later than entering into a non-binding Letter of Intent). Each is discussed below.

General Deal Rationale Questions

  1. Your Goals, Our Strategic Fit & Your Future Plans for Us

  • What are your specific strategic reasons for acquiring our Company?
  • What are your specific growth and other plans for our business post-Closing?
    • Role of organic growth and additional acquisitions?
    • Market expansion and new product/service development? 
  • How will our business fit into your existing operations or roster of portfolio companies?
    • Platform?  Tuck-in?  Bolt-on?
  • What specific synergies do you see?
    • Cost optimization and economies of scale? 
    • Financial and other efficiency improvements?
    • Cross-selling to your existing customers?
  • What changes, if any, do you plan to implement in the short and long term?
  • Are you expecting the current management team to stay on post-Closing?
    • If so, who and for how long? 
  • How do you plan to leverage our existing customer base and market position? 
  • How will you maintain and enhance customer loyalty?

  1. Cultural Alignment & Workforce and Operational Integration

  • How do you approach integrating acquired companies generally?
  • Do you envision any changes in our leadership?
  • Which of our employees have you identified at this point as essential to retain?
  • How do you plan to integrate our culture with yours? In other words, what is your philosophy and specific plans for preserving our existing culture?
  • How will you manage and promote employee retention and morale during and after the acquisition?
  • How will you handle any potential operational redundancies? When?

  1. Your Support of our Company

  • Who are your key team members who will be responsible for managing the acquisition process?
  • Who are the key individuals who will be responsible for managing the business post-Closing?
  • What resources and support will you provide to us during the pre-Closing and post-Closing transition periods? Be specific, please.
  • How will you ensure a smooth transition for our customers, suppliers, and other non-employee stakeholders?

  1. Your Past M&A Track Record

  • Can you provide examples of recent similar acquisitions you have completed successfully?
  • What is your experience in our specific industry and sector and with similarly sized businesses? 
  • Can you provide examples of acquisitions you pursued but that either did not close or failed to achieve your post-Closing objectives? Why?
  • Have you ever renegotiated the purchase price or key deal terms post-LOI? Why?
  • What pre-Closing challenges have you typically faced in previous transactions, and how did you resolve them?
  • What post-Closing challenges have you typically faced?
    • What is your indemnity claim experience generally?
    • What is your experience regarding the use and payment of earn-outs (if applicable)?
      • See Earn-Outs for more details and key issues

  1. Our Final Business Questions

  • Help us understand what truly differentiates your offer from those of other bidders?
  • What are your other long-term goals for our business?
  • In sum, why do you believe you are the best fit to acquire our business?
 

Deal-Specific Questions

To the extent not previously answered, other more deal-specific questions to be answered, typically before or in the context of entering into a non-binding Letter of Intent, include:

  1. Your Offer, Deal Structure & Financial Capability

  • What is your precise purchase price and payment structure?
    • How did you value our Company, and how did you arrive at the purchase price?
    • Indicate the principal drivers, including valuation multiples, EBITDA, etc.
    • Share your thoughts regarding Net Working Capital targets and calculations.
  • Does your offer presume an earnout or any contingent or deferred payments?
  • Is your preferred deal structure a stock or asset acquisition? Why?
    • Does your offer require any pre-Closing reorganization of our Company?
      • Will you agree to a gross-up for any incremental taxes we incur as Sellers as a result of your preferred deal structure?
  • How will you finance the acquisition? 
    • What is your planned capital structure (i.e., the mix of debt and equity)?
    • Are funds already in hand, committed or secured?
    • Can you provide proof of funds or a financing commitment letter?
    • What contingencies are tied to any required financing?
  • What is your approach to managing and retaining key employees generally?
    • Confirm that you will commit to offering foundational compensation and benefits for at least the first year post-Closing, no less favorable than what is currently in place.
    • What equity-based incentives will be offered to our key employees post-Closing?
    • What is your philosophy on retention or stay bonuses?
    • Who will receive written employment agreements?
  • What are your plans to manage our existing debt and liabilities?
  • Are there any other contingencies attached to your offer?
  • Will you allow/require us to roll some of the purchase price over into equity?
    • How much? 
    • In equal or proportionate amounts for all rolling owners?
    • What entity will issue the rolled equity? What class? At what price?
    • Since an equity roll is the “deal within a deal,” Sellers should conduct meaningful reverse due diligence of the precise post-Closing entity issuing the equity.
      • Such diligence should include valuation, governance, tax, legal and other matters.
      • Such diligence should occur sufficiently early in the process so the findings are incorporated into the overall decision to roll (or select the winning bidder).
      • See Equity Rolls for more details and key issues
  • How will you handle liabilities, warranties and indemnities? 
    • Will you purchase representation and warranty insurance at Closing? Terms?

  1. Your Remaining Due Diligence and Timeline to Close

  • What risks or concerns do you perceive in closing this transaction, and how do you plan to address them?
  • Are there any key contingencies or conditions that could delay or derail the transaction?
  • What is your typical confirmatory due diligence process, and how long do you expect it to take?
    • Who are the key members of your diligence team, both internal and external?
    • Will you insist on performing a third-party Quality of Earnings (QoE) analysis (i.e., financial accounting due diligence) to assess our financial statements and records, focusing on the reliability and sustainability of adjusted or normalized financial results?
  • What specific additional information will you need from us during confirmatory due diligence?
  • What internal or third-party approvals are required on your end? When?
  • How do you plan to address any potential legal or regulatory issues?
  • What is your expected timeline for completing the acquisition?
  • Are you willing to negotiate terms to accommodate specific Seller needs?
  • Does your legal counsel have recent experience in handling acquisitions in our industry?
  • Can you provide personal references from other previous sellers and business owners you have worked with?
    • Talk to the references provided about what post-closing life has been like for them.
    • Also talk to other sellers and owners who are not specifically identified by the Buyer, if possible
  • Do you have any questions or concerns about the sales process we are running?

  1. Confidentiality Concerns & Protecting Sensitive Communications

  • How will you ensure confidentiality during the negotiation and due diligence phases and throughout the entire acquisition and closing process?
  • What protections will you commit to use throughout the pre-Closing period to protect our competitively sensitive information (“CSI”), so that if the deal does not close for some reason, we are not at a competitive disadvantage in the marketplace?
  • What is your proposed communication plan and timeline for informing employees, customers, and other key stakeholders about the transaction? Be specific, please.

  1.  Your Contingency Plans

  • What are your backup plans if the acquisition does not proceed as planned?
  • How will you handle any unforeseen post-Closing challenges or obstacles?

There are two types of reverse diligence in sell-side M&A. One form involves a Seller anticipating what issues bidders will focus upon and the information they will request and proactively presenting that information in a “best foot forward” way that makes a compelling case for the business. The other form of reverse diligence involves a Seller asking the right questions of bidders to ensure that the Buyer’s goals align with the Seller’s priorities. Answers to the right questions will help a Seller determine a bidder’s financial strength, capability to close the deal, post-Closing strategic alignment, and overall suitability as a Buyer.
The above summary has been prepared for general informational purposes only and is not intended as legal advice.  Sellers and Buyers alike are urged to consult their legal counsel concerning any particular situation and specific legal questions.  Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.

© 2025 Whiteford, Taylor & Preston L.L.P.