In case of business disposals, vendors want to maximise the sales price, while at the same time keeping the sales process as efficient as possible. Experience has shown, however, that lack of preparation, insufficient regard for business performance during the disposal process and poor process management are among the factors in a divestment process that have a negative influence on value. This is where a vendor due diligence may come into play.
A vendor due diligence is a thorough due diligence of a business, which aims to address the concerns and issues that may be reasonably relevant to a potential purchaser. The vendor due diligence report will be provided to each potential purchaser, rather than multiple purchasers undertaking extensive individual due diligence exercises. A vendor due diligence is therefore suitable in situations where there are likely to be a large number of potential purchasers, typically in an auction process.
The relevant areas of concern may include amongst others the financial, tax (such as corporate income tax, VAT, social security tax and customs & excises), legal, labor, IT, environment and market/commercial situation of the company.
Provided that the vendor due diligence is performed by an independent M&A advisor of high reputation, the purchasers may consider relying on the vendor due diligence report in the same way as if it would have been a purchaser due diligence.
Advantages of a vendor due diligence are amongst others:
- It highlights on beforehand potential issues that could complicate the sale, allowing the vendor to remediate these issues as much as possible before the business is actually offered for sale.
- It may avoid the need for multiple in-depth acquisition due diligences by potential purchasers, hence allowing the management of the Target to keep focussing on the business rather than on the sales process.
- It allows starting to develop an optimal deal structure in an early phase of the sales process.
- It limits the time necessary to negotiate on the SPA since potential risks to be covered are known as from the beginning.
- It limits the possibility for potential acquirers to decrease their initial offer on the basis of the due diligence findings (since they are already aware of them at an early stage).
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