Vendor Due Diligence

When you plan to sell your business, it is important to stay in control. During due diligence in larger deals, it is often common to have the seller perform this process. An external firm (very often the guiding corporate finance firm of the sales process) will perform vendor due diligence and will prepare the documentation. The information provided is similar to what is normally investigated and described by the due diligence team of a buyer. A possible deliverable is a financial due diligence report with all kinds of information on the financial health of a company including the core business drivers that determine business performance. In brief, this is the outcome of the vendor due diligence process.

An alternative to vendor due diligence is vendor assistance support. This is pro-active support in the process of a business sale. The CFO and the guiding corporate finance firm are supported in providing consistent and clear financials (called a ‘financial factbook’) that will give an independent view to each buyer. We provide further details of the activities we can perform in the vendor assistance support process.

Possible objectives and advantages of vendor due diligence processes

The objectives of vendor due diligence are numerous. Most buyers want answers to many of the same questions, so it makes sense to provide that information directly via an independent due diligence process initiated by the sellers themselves.

Here is a list of possible objectives within the vendor due diligence process:

• Vendor due diligence (DD) should speed up the sale process as large pieces of information are made readily available to interested buyers
• Vendor DD eliminates the duplication of due diligence work by multiple buyers (or at least reduces the need for buyer’s due diligence)
• If performed well, vendor due diligence provides greater credibility to facts and numbers as they have been verified by external accountants
• A buyer will gain confidence that a seller is really committed to selling
• Vendor due diligence saves costs as the work is only done once
• Vendor due diligence can reduce the amount of confidential material that is disclosed to a possible buyer who might become a potential competitor again, if they do not do the acquisition, in the future

Vendor due diligence is unlikely to fully satisfy all buyers. It does not replace the buyer’s due diligence but reduces it. Although vendor due diligence reduces the amount of work available for legal and financial advisers, vendor due diligence does have its disadvantages. Below we describe in more detail the possible disadvantages of the vendor due diligence process.

Issues and disadvantages of most vendor due diligence processes

The vendor due diligence process is not without criticism. The process is very often in the hands of the same corporate finance team that is guiding the transaction. They have a clear interest in getting any M&A deal done as a large part of their transaction fee will depend on the outcome of the business sale. Hence, it is clear that vendor due diligence needs to be as transparent and objective as possible to achieve the most validity.

Here is a list of possible issues within the vendor due diligence process:

• Often carried out by the same corporate finance adviser of the seller that is managing the transaction and hence has an interest in closing a deal
• Buyers may get the feeling that the process is fully controlled by the seller
• Buyers might ask to make all information fully available in order to check all details

Scope of vendor due diligence (vendor transaction support) process

Our advisers have a pragmatic approach to the vendor assistance support process. It is not a standard process but adjusted to the specific needs of each business sale. The size of the transaction, the available knowledge with the CFO’s team, and the willingness of the seller to commit financial resources have an enormous influence on the process we are able to administer.

The main objective of this process is to ensure all numbers are consistently reported in all available documentation. The key deliverable is called a ‘financial factbook’ that contains all relevant financial figures and KPIs on a monthly or quarterly basis. These numbers are reconciled to all audited financials and management presentations. Hence, this financial factbook is trustworthy and gives an excellent insight into the main business drivers of the company.

Here is a list of possible items where we can support you during vendor assistance (including the due diligence process):

• Put together detailed financial documentation (‘financial factbook’)
• Overview normalized results (also on a monthly or quarterly basis)
• Provide current trading updates when required
• Business plan analysis
• Management of the data room process

Information about vendor due diligence

If you want to have a brainstorming session with us about your due diligence process when you plan a business sale, please get in touch. Corporate Finance in Europe consists of independent advisers that can help you in the vendor due diligence process. We have active full-time advisers in the due diligence field and help sellers to prepare for and organize this process. Our people are independent and give an objective opinion on their due diligence reports. Their view is objective, pragmatic, and very much oriented to a successful business sale. Please contact us if you need support in the vendor due diligence process.

Due diligence is a small part of the complete process of selling a business. If you have serious plans for selling your business the following pages might be interesting:

• The process of selling a business
• How to prepare for a business sale
• Increase the value of your company
• The costs of selling a company