Selling a company is one of the most significant and challenging moments for any entrepreneur, regardless of its size.
In this process, preparation is key, and one essential aspect that can make the difference between a successful closing and a negotiation full of setbacks and/or the emergence of potential contingencies, future claims, and legal proceedings is conducting a Vendor Due Diligence (VDD).
In this article, we’ll explore what this concept is, its importance, and the practical steps to implement it effectively.
What is Vendor Due Diligence (VDD)?
Vendor Due Diligence is a thorough review of the financial, legal, tax, and operational aspects of a company, conducted from the seller’s perspective before putting it on the market. Unlike traditional Due Diligence, which is carried out by the buyer to assess acquisition risks, VDD allows the seller to identify and resolve potential issues before they are discovered by the buyer—reducing conflicts that could arise over the final purchase price, earn-outs, typical “deadline” issues that can cause a deal to fall apart if negotiations drag on, or actions aimed at remedying contingencies identified in the VDD.
Additionally, having documentation prepared and organized for a potential Due Diligence will save you a lot of stress and sleepless nights.
The Importance of Vendor Due Diligence
There are many benefits that come with vendor due diligence, such as:
- Risk reduction: Anticipating possible contingencies and areas of concern minimizes surprises during negotiations.
- Building trust: A company that presents a detailed and transparent VDD inspires greater confidence in potential buyers, which can speed up the sales process.
- Valuation improvement: Identifying and addressing weaknesses before negotiations helps protect or even enhance the perceived value of the business.
- Time optimization: Solving issues before starting the sale process avoids costly and frustrating delays.
Steps to Conduct an Effective Vendor Due Diligence
When conducting a vendor due diligence, it’s important to follow certain steps to ensure it adds value:
1. Define the team
Assemble a multidisciplinary team that includes financial, legal, tax, and operational experts. Most companies don’t have these internal processes, so it’s essential to hire external lawyers with M&A (mergers and acquisitions) experience.
2. Conduct a detailed financial analysis
Review the company’s financial statements, ensuring they are audited (if applicable) and updated at least quarterly. Pay special attention to areas such as recurring revenue, operating costs, liquidity, and debt. Also, prepare a Pitch Deck that includes a clear summary of the business, its competitive advantages, and future financial projections. This document will be valuable not only for the VDD but also as a key tool during negotiations.
3. Assess legal aspects
Review key contracts such as agreements with suppliers, customers, and employees. Identify potential legal risks, such as pending litigation or contractual breaches. Including a section in the Pitch Deck that outlines the company’s current legal situation can help demonstrate transparency and readiness.
4. Review tax compliance
Ensure the company is up to date with its tax obligations and that there are no hidden liabilities. This is a sensitive area that can create mistrust among buyers if not fully in order.
5. Analyze business operations
Evaluate the organizational structure, key processes, and technology used. Identify areas of improvement that can increase the company’s efficiency and competitiveness.
6. Document and communicate contingencies and strengths
Prepare a clear and detailed report with the VDD findings. This document should highlight the strengths of the business and proactively address any identified risks, along with the actions to be taken to mitigate them.
7. Resolve identified issues
Before presenting the company to potential buyers, work on resolving the issues identified during the VDD. This may involve renegotiating contracts, settling debts, or implementing operational improvements.
Additional Benefits of Vendor Due Diligence
Carrying out a VDD not only prepares your business for sale, but can also provide valuable insights into its current state and areas for improvement. This exercise can also serve as a strategic planning tool, helping you make more informed decisions about the future of your business.
Conclusion
Vendor Due Diligence is an investment in peace of mind and the success of your company’s sale. By anticipating potential challenges and showing transparency, you will not only increase the chances of closing a successful deal but also protect the value of your business.
If you’re considering selling your company, starting with a VDD will put you in a stronger position with potential buyers.
Article written by:
Tax Lawyer and M&A
jose.perezfuster@metricson.com
About Metricson
With offices in Barcelona, Madrid and Valencia and a strong international presence, Metricson is a pioneering firm in legal services for innovative and tech companies, where you’ll find experts in all areas necessary to carry out a complete and effective Vendor Due Diligence and receive support for both the preparation of the VDD and any aspect related to the sale process of your company.
If you’d like to contact us, don’t hesitate to write to contacto@metricson.com. We’d love to hear from you!