Vendor Due Diligence

Overview

Vendor due diligence is a financial report prepared for the seller, usually before a sale process starts, and then made available to bidders. It sets out how the business has traded, what its sustainable earnings are, what working capital it needs and which items should be treated as debt.

Sellers who rely on bidders to build their own picture from raw data lose control of the narrative. A well-prepared report puts a consistent, evidenced set of numbers in front of every bidder and allows the process to focus on value rather than on basic questions about the data.

What the service covers

The scope is agreed with you and your corporate finance adviser and is normally a factual report. It typically covers:

• Historical trading performance by period, segment, product and customer.
• Reported and adjusted EBITDA, with each adjustment explained and supported.
• Net working capital, including monthly movements, seasonality and a proposed normal level.
• Net debt and debt-like items, so that bidders do not discover them late and use them to reduce price.
• Cash flow and capital expenditure.
• Key performance indicators that bidders will focus on, and the basis on which they are calculated.
• Where required, a high-level view of the management forecast and its link to trading.

Key activities and deliverables

Key activities

• Agree the scope, the basis of preparation and how bidders will be able to rely on the report.
• Collate and reconcile the underlying financial information, and identify gaps or inconsistencies before bidders do.
• Analyse earnings, working capital, net debt and cash flow, and agree the treatment of each adjustment with management.
• Draft the report and the supporting databook, and take management through the content before release.
• Support the data room and respond to bidder questions on the financial content.
• Update the analysis for the latest trading period as the process moves forward.

Deliverables

• A vendor due diligence report for release to bidders.
• A reconciled databook that bidders can use for their own analysis.
• A short pre-sale issues note for the seller only, where we find matters that should be addressed before launch.
• Support in preparing responses to bidder questions.

Our approach and methodology

We begin with a readiness review so that you see any weaknesses in the numbers before bidders do. Where the data is incomplete or the accounting judgements are open to challenge, we recommend how to resolve them while there is still time to do so.

The report is written to be read by buyers and their advisers. It is factual, internally consistent and reconciled to the accounting records. We agree the basis of preparation and the terms on which bidders may rely on the report with you at the outset, and we keep independence from the sale outcome so that readers can trust the content.

Benefits for clients

• More control over how the business is presented and which numbers the process is built on.
• Fewer late price renegotiations caused by issues bidders find only in confirmatory work.
• A shorter, more focused process, because bidders start from a common reconciled dataset.
• Less strain on management time, as repeated questions are answered once in the report.
• A clear view of your own business's earnings and net debt before negotiations begin.

Who needs this service

Vendor due diligence is particularly useful for:

• Owners and shareholders preparing to sell all or part of a business.
• Private equity sponsors planning an exit.
• Corporates disposing of a subsidiary or division, including carve-outs.
• Founders and family businesses selling for the first time, where finance records have not been tested by an outside party.
• Corporate finance advisers running a competitive sale process.

Scope and limitations

Our work is advisory. It is not an audit or a review under auditing standards and does not provide assurance on the financial information. We rely on the information and explanations management provides, and we state the basis of preparation and any limitations in our report.