Vendor due diligence: what, why and when

In an acquisition process, due diligence is often the domain of the buyer. Especially when working with a sales agent, sellers take matters into their own hands with a vendor due diligence (“VDD”). What is it, why is it gaining popularity, and how does it limit risks for sellers? In this article I discuss the VDD as a strategic instrument in M&A practice.

What is vendor due diligence?

With a VDD, the seller has a due diligence report drawn up about the company to be sold, which is usually drawn up by an external financial, legal and/or tax advisory firm. This report is then shared with potential buyers – with or without the guidance of the legal advisor or a sales agent – ​​so that they get an initial picture of the company. The VDD therefore (often) comes at the beginning of the sales process and forms the basis for the bidding process.

A VDD usually contains information about:

• the legal structure;
• current contracts and obligations;
• employment relationships;
• tax positions;
• compliance and permits; and/or
• any claims or risks.

Why would a seller want to do this?

Having a VDD performed can have several advantages:

• Control over information: the seller initially determines what and how it is shared. This prevents having to respond to questions from buyers in the hustle and bustle.
• Speed ​​in the process: buyers can decide more quickly whether they want to proceed at all and under what conditions.
• Level playing field: in a controlled sales process (for example at an auction), all bidders work with the same information.
• Cost savings for buyers: especially interesting for strategic buyers without large deal teams.
• Limitation of liability: risks that have been shared are less likely to lead to claims later, because the buyer was already aware of certain risks at an early stage.

Please note: a VDD does not replace the buyer’s own investigation. With a VDD, the seller fulfils its duty to inform the buyer. Follow-up questions can always arise. Nevertheless, a good report provides a solid starting point for negotiations.

Legal impact of a VDD

A frequently asked question is whether the seller remains liable, despite the openness of the report. The answer: yes, unless properly arranged. A report that exposes risks but does not cover anything else in the purchase agreement is of limited legal use. The following matters, among others, must be properly recorded in the purchase agreement:

• Disclosures: matters included in the VDD must be formally exempt from warranties.
• Non-reliance clauses: if the report is prepared at the request of the seller, advisors often want buyers to declare that they do not derive any rights from it.
• Limitations on liability: for example a ceiling, threshold amounts or time limits.

When is a VDD useful?

A VDD is particularly useful in competitive sales processes with multiple buyers or, for example, when speed is required.

A VDD is less common in a one-on-one sale, but it can be useful if you want to create a strong starting point in the negotiation. In pre-exit processes (for example, in sales to private equity), we increasingly see that sellers are already ‘putting their house in order’ via a VDD.

Finally

A VDD is not a formality. It is a strategic move that helps you as a seller to maintain control, avoid surprises and possibly limit liability. Always have the report legally and commercially coordinated with your advisors, so that it is not just an informative document, but becomes part of your transaction strategy. We are happy to help you with this!

Are you considering selling your company? Our specialized lawyers are happy to advise you on the possibilities of a VDD, structuring the sales process and legally covering your risks.