The added value of vendor due diligence

At a shorter notice before the start of a sales process, it is increasingly common to opt for conducting a so-called Vendor Due-Diligence ("VDD"). The VDD is similar to the due diligence that comes up later in the sales process, but in this case it is actually initiated from the seller.
Typically, a VDD is conducted on one or more business aspects such as financial, tax and legal. This article will elaborate on the aforementioned different VDD areas, as well as the added value of a VDD for a selling shareholder.

Financial

A financial VDD focuses on the company's historical financial data, looking in detail at customer and supplier level developments, price trends, seasonal effects and (working capital) investments, among other things.

The results will partly confirm what the DGA already suspected, but there will also be analyses that shine a different light on, for example, price and margin trends or dependence on certain customers or suppliers.

Tax

The fiscal VDD, often chosen in combination with a financial VDD, focuses mainly on fiscal compliance within the company; are payroll taxes paid on time, is VAT paid on time, etc.
When a company makes (frequent) use of fiscal schemes and subsidies such as, for example, the innovation box or WBSO, it can be important to understand the impact of this. Especially in combination with a possible acquisition that could potentially affect the company's eligibility for such tax schemes and subsidies.

Legal

A legal VDD is pre-eminently a part of the preparation in which matters can still be fixed or adjusted for the benefit of the sales process. Examples include the contractual relationship with key customers and suppliers, whether staff are covered by the correct pension plan, but also issues such as the ownership of customized software; does it belong to the developer, or does it belong to the company?
Often there are also issues that come to light that cannot easily be adjusted before the sales process. However, the fact that these issues have surfaced well before the sales process, gives the M&A advisor room to develop a strategy around them as to how to convey this to potential buyers in due course.

How does the VDD help the selling shareholder?

The insights gained from the various VDDs greatly enhance understanding of the business. By gaining further insight regarding financial, tax and legal concerns early in the sales process, potential risks and red-flags can be remedied in a timely manner or strategically presented to a potential buyer, improving the overall attractiveness of the company.
In addition, the ability to share VDDs with selected parties prior to the submission of an offer gives more weight to the final offer to be received. The VDD thus provides more certainty and less room for negotiation during due diligence.
At the same time, knowing the VDDs already conducted, gives potential buyers more comfort in making a bid. The ability to bid on externally validated figures can be a determining factor in a potential buyer's consideration of whether or not to bid, especially when potential buyers are large strategic parties or international Private Equity parties.

This knowledge article was posted on the Brookz website.

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