Vendor Due Diligence Reports

What are Vendor Due Diligence Reports?

Vendor due diligence reports are prepared by third-party advisors at the vendor’s request. They are an independent analysis and evaluation of a company’s performance, risks and opportunities for potential investors.

A Vendor due diligence report provides an in-depth review and assessment of a particular aspect of the business such as legal, financial or operational performance and identifies any risks associated with your company. These reports are prepared by third-party experts and convey business stability and performance of your company to the potential investors.

While each individual report focuses on a particular aspect, it is common for a range of reports to be prepared by different advisers for the same transaction. Common due diligence reports include:

• Accounting & Tax: Review of the financial re- performance of the business covering both headline reporting numbers as well as specific issues such as movements in price and volume, cost breakdowns, working capital management, gearing levels and capital expenditure profile among others
• Legal: Review of the key legal risks arising from the material contracts of the business as well as the regulatory framework under which it operates
• Commercial: Review of the competitive landscape of the business along with the risks and opportunities present in the marketplace and potentially also forecasts for future volumes and price
• Technical: Review of the physical operations of the business including an assessment of the nature and condition of the key assets that underpin those operations and potentially also forecasts for future capital expenditure requirements
• Environmental: Review of the company’s compliance with the relevant environmental regulation and the potential for any future limitations to be placed on the existing operations or future expansion of the business as a result of current or anticipated environmental regulations
• Insurance: Review of the current insurance policies in place and an assessment of their appropriateness for the business going forward as well as potentially a forecasts for future insurance costs

Why are Vendor Due Diligence Reports important for business today?

Vendor Due Diligence Reports are only prepared for a specific event. However retaining a copy of these reports prepared for past events can serve as a useful source of material for ongoing risk registers and other situations which require a critical evaluation of the business.

Why are Vendor Due Diligence Reports important for an event tomorrow?

While these reports come at a cost, they are potentially important for an event tomorrow for the following reasons:

• They lower the cost to potential investors of conducting full diligence by providing a ready made due diligence report prepared by a respected third party
• A potential investor can then either review this material themselves without further assistance or employ their own adviser under a much reduced scope of work that only involves checking and assessing the reports quality and comprehensiveness.
• This in turn enables a greater number of potential investors to pursue the opportunity given the lower cost of participation
• They may also convince multiple parties to conduct full due diligence simultaneously whereas otherwise they would have insisted on only conducting due diligence on an exclusive basis
• This has the benefit of extending the period of competitive tension into the full due diligence process, thereby increasing the chance of achieving favourable terms
• They reduce the total time spent my management facilitating due diligence by ensuring the same fundamental due diligence questions do not need to be answered repeatedly for each bidding group
• They also provide a mechanism for educating potential investors on the nuances of your business, particularly for those investors that may not have a great deal of familiarity with your industry, regulatory environment, competitive landscape or geographic region. This is often the case with financial investors such as private equity firms that may have limited prior knowledge
• Finally they increase the confidence of bidders knowing that a respected third party adviser has assessed the business and therefore the potential for material issues to have been missed is diminished

Pros of addressing Vendor Due Diligence Reports

• Increases the field of potential investors
• Provides greater incentive for financial investors to participate
• Potentially lengthens the period of competitive tension in the process
• Reduces the burden on management’s time, particularly when a high degree of interest is expected

Cons of not addressing this topic

• Potentially reduced number of bidders who can participate to the end given the higher costs involved
• Increased potential for bidders to demand exclusivity before conducting full due diligence
• Reduced potential for financial investors to participate given the cost of getting up to speed
• Increased burden on management time through repetition in the questions being asked and answered