Why is vendor due diligence important?

by | Jan 5, 2016 | Education

Never a day goes by when businesses are not sold. Once the decision has been made by management to sell the business there is a need to assess the situation in its entirety otherwise the owners may miss the opportunity to increase their negotiation power with potential buyers. The best approach to understanding the often overlooked strengths of the business is through vendor due diligence.

Vendor due diligence is carried out by an independent third party; potential buyers will be doing the same thing. In both cases; the independent reports given to the vendor as well as the buyer helps each party during their negotiations.

During the vendor due diligence process the third party analyze the company in detail, an assessment of earnings quality, asset quality, taxes that are due as well as both commercial and operational due diligence. Commercial due diligence is of significant importance if future revenues are an important component of the sales price whereas operational due diligence takes into account any unusual or proprietary processes that have a significant impact on the company’s value.

Vendor due diligence is extremely important; it brings numerous points to the attention of the seller, points that can help in negotiations.

  • The seller will be armed with information that will allow for a full explanation of any circumstances that might be considered as a flaw by interested buyers.

  • The seller will be well positioned to answer any questions or support answers with documents that will no doubt come out of the buyers due diligence.

  • Minimize the possibility of any surprises that may come out of the buyers due diligence.

  • It allows both parties an opportunity to eliminate possible road blocks in the sale process, this will allow the seller to keep the prospective buyer involved longer, it allows the seller to maximize the price by lengthening the competitive tension.

  • When the vendor due diligence has been done in a very thorough manner the period of exclusivity can be shortened, the buyer will be better positioned to validate their decision.

Once the decision has been made by the owners to sell the company, vendor due diligence is usually the first thing done prior to putting the business on the market. This gives the seller and the third party expert an opportunity to review the company in detail, putting right any wrongs prior to the sale. The whole concept of vendor due diligence is to give the owner greater negotiating power  and to enhance the valuation of the business.

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