The seller has finance, tax and legal matters, and sometimes market or technical aspects, reviewed in advance. The result is a report or a purely descriptive fact book. Interested parties receive it via the data room. Whether the advisers are liable to the buyer is governed by a reliance letter. Usually no liability is assumed, in which case there is only a non-reliance letter.
For sellers of mid-sized companies, VDD brings three advantages. First, you identify weaknesses before the buyer finds them and can fix or explain them. Second, you negotiate on an equal footing because you know the facts. Third, the auction process becomes faster because several interested parties bid on a common basis.
The seller bears the costs. They pay off above all in auction processes with several interested parties. Buyers usually still carry out their own, leaner review. VDD also makes it easier to take out W&I insurance, because the insurer relies on a robust due diligence report.
Example
Hypothetical example: A service company with €20 million turnover has a financial VDD prepared before the sale. It uncovers undocumented one-off effects of €0.3 million in EBITDA. The seller adjusts for them openly, instead of a buyer later using them as grounds for a price reduction.
Vendor due diligence vs. buyer due diligence
| Feature | Vendor DD | Buyer DD |
|---|---|---|
| Commissioned by | Seller | Buyer |
| Timing | Before approaching the market | After the LOI |
| Costs | Seller | Each bidder |
| Benefit | Control of the story | Protection for the buyer |