Vendor Due Diligence: a strategic tool for the sale of your company
Selling a business is one of the most important decisions an entrepreneur can make. However, many sales transactions fail due to a lack of preparation on the part of the seller. In an increasingly demanding and competitive market, preparation is an essential factor in achieving the best possible result. If your company has grown significantly and is at an optimal moment in terms of turnover, profits and market positioning, it may be the ideal time to sell and maximise the profitability of the transaction. But how do you avoid setbacks, maximise the value of the business and streamline the sale process? The answer lies in vendor due diligence, a key tool that allows the seller to take control of the process and build buyer confidence.
What is vendor due diligence?
Unlike traditional due diligence, in which the potential buyer or investor carries out a thorough investigation of the target company in order to detect not only the opportunities it offers but, above all, the risks that may affect the transaction in order to quantify them and obtain in exchange a price reduction or negotiate additional guarantees, vendor due diligence is a prior process carried out by the seller himself, with the help of legal and financial advisors, before putting his company on the market for sale.
Its objective is to analyse the company’s situation in depth from a legal, fiscal, labour and financial point of view, in order to detect and correct possible risks before they are pointed out by a potential buyer or investor. The seller’s proactivity in carrying out this prior review helps to speed up negotiations, reduce uncertainty and increase the value of the company on the market.
When to conduct vendor due diligence?
Any entrepreneur who is considering selling his company or looking for investors in the short to medium term should consider vendor due diligence. It should be borne in mind that vendor due diligence, as well as the mitigation of any contingencies identified, takes time and it is recommended that vendor due diligence be started at least six months to a year before going public.
Key benefits of vendor due diligence
(i) Reduces the risk of negotiation failure
Many transactions fail when the buyer discovers risks or issues that were not previously identified. By conducting vendor due diligence, the seller can identify risks inherent in the transaction, such as hidden liabilities or compliance issues that may affect the viability of the transaction, anticipate those issues, correct or mitigate them, and avoid last-minute surprises.
(ii) It allows the operation to be structured
Vendor due diligence allows for a more efficient and effective design of the transaction. This process not only involves reviewing the seller’s legal, tax, labour and financial situation, but also allows for an analysis of how best to structure the transaction to maximise the benefits and minimise the risks. This may include key decisions on how the sale is organised, whether through a purchase of assets, shares/equity or through a merger, identifying the most beneficial structure from a tax point of view.
(iii) Speeding up the sales process
Having all documentation prepared and validated avoids unnecessary delays in the negotiation and buyer due diligence process. This means reducing timeframes and avoiding negotiation fatigue, which can lead to a loss of interest on the part of the buyer.
(iv) Maximises enterprise value
Vendor due diligence identifies risks to optimise the valuation of the company before negotiations begin. Correcting legal, tax or labour issues in advance can make the company more attractive and justify a higher sale price.
(v) Minimises the impact of price adjustment clauses
Buyers often include price adjustment clauses based on possible contingencies or risks identified in the due diligence. If these risks have been previously identified and mitigated, the seller has greater bargaining power to avoid discounts or withholdings in the final price or when setting representations and warranties.
(vi) Improves the seller’s negotiating position
Vendor due diligence allows the seller to be better prepared and have more control over the negotiation. In addition, you can enter into negotiations with multiple buyers in a structured manner and with a competitive advantage.
(vii) Increases buyer confidence
One of the main challenges in any sale and purchase of a company is the lack of information or uncertainty about the reliability of the data. A well-structured vendor due diligence provides potential buyers with a detailed and transparent report on the company, building trust and demonstrating professionalism.
What aspects does vendor due diligence cover?
Although the scope of vendor due diligence will depend on each type of company, there are key aspects that should be analysed in any case, such as the following:
- Legal Due Diligence: Corporate structure, analysis of contracts, assets (including intellectual and industrial property rights), regulatory compliance and litigation.
- Tax Due Diligence: Review of tax obligations and latent tax risks.
- Labour Due Diligence: Analysis of employee contracts, employment conditions, false self-employed and risks of labour contingencies.
- Financial Due Diligence: Review of financial statements, EBITDA, debts, assets and liabilities.
Vendor due diligence is a strategic investment for any entrepreneur who wants to sell his company successfully. If you are thinking of selling your business, don’t wait for buyers to set the pace: take the initiative and optimise your sales process.
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