Commercial Vendor Due Diligence
What is a Commercial Vendor Due Diligence?
When it comes to buying and selling companies, various due diligence checks are usually carried out, i.e. analyses of the company to be bought or sold. The main areas here are Financial Due Diligence, the analysis from a financial and accounting perspective; Legal Due Diligence, the analysis from a legal perspective; and Commercial Due Diligence (or Market Due Diligence), the analysis from a commercial perspective. The latter usually comprises the examination of the company, including the sustainability of the business model and the products or services, the markets and their drivers, the competitive situation, the customers and their opinion of the company, as well as the assessment of the sales planning as the quintessence of this. In addition, further growth potentials of the company are also usually examined.
Commercial Vendor Due Diligence (VDD) is a Commercial Due Diligence conducted by the vendor. The vendor usually commissions a management consultancy specialised in this area. Thus, the buy-side can rely on the Commercial Vendor Due Diligence to provide a neutral view and a professional analysis.
What are the goals of a Vendor Due Diligence?
When preparing a Commercial Vendor Due Diligence (VDD), the sell-side pursues several objectives. On the one hand, the aim is to explain to potential buyers why the investment/company is attractive. As a rule, these potential buyers, such as private equity funds, have a large number of proposals "on the table", i.e. offers for companies for sale. The Commercial Vendor Due Diligence is intended to provide a decision-making aid for taking a closer look at the company.
Secondly, a Commercial Vendor Due Diligence is intended to give the buyer a better feel for the company and its market environment before submitting a bid, thus enabling a more accurate risk assessment of the investment. This is not entirely altruistic, because in the end it usually results in a higher sales price.
And: a Commercial Vendor Due Diligence is intended to serve the buy-side as a kind of second opinion from an independent source. For this reason, the sell-side usually commissions an external consultancy to carry out the Commercial Vendor Due Diligence.
What are the benefits of a Vendor Due Diligence for the vendor?
A Commercial Vendor Due Diligence offers several advantages to the sell-side. Professional Commercial Vendor Due Diligence usually persuades more potential buyers to bid for the company. This is also because it enables a more precise risk assessment of the investment. The more bids and the lower the risk, the higher the selling price. This means that the costs of a Commercial Vendor Due Diligence always pay off for the seller.
In addition, the sell-side receives information that can be used for the so-called investment memorandum, a kind of portrait of the company for sale.
What's more, the existence of Commercial Vendor Due Diligence can lead buyers to decide more quickly to buy a company, since the buy-side does not necessarily have to conduct its own commercial due diligence. It therefore speeds up the process, which is increasingly important today due to competitive sales processes.
How does a Vendor Due Diligence differ from sell-side or buy-side due diligence?
Sell-side due diligence is a synonym for Vendor Due Diligence —in this respect, there is no difference in meaning between these two terms. A sell-side due diligence or Vendor Due Diligence is prepared by the seller side, while a buy-side due diligence is prepared by the buyer side. In terms of content, there is usually little difference between the two documents. However, a Vendor Due Diligence is often more comprehensive than the buy-side analysis.
When is a Commercial Vendor Due Diligence prepared and by whom?
The Commercial Vendor Due Diligence is carried out by the seller. As a rule, the seller commissions a management consultancy to carry out the due diligence to present the buyer with as neutral a view of the situation as possible.
A Commercial Vendor Due Diligence is performed relatively early, usually 3 to 6 months before the company is put on the market. When choosing the timing, however, it is important to keep in mind that the market environment may change quickly. The information contained in the due diligence may be outdated by the time the company is actually sold if the timing is not right.