Vendor Due Diligence
Vendor due diligence is a review of a company commissioned by its own owner, from an independent third party, before a sale process starts. The report is made available to all interested buyers and is intended to avoid surprises, protect the negotiating position and speed the transaction up.
What vendor due diligence does
In a classic due diligence the buyer examines the target. In vendor due diligence the seller reverses that order: before the process begins, it commissions an independent third party – usually an audit firm – to examine its own house, and makes the report available to every interested buyer.
The purpose is not marketing. It is control over the process. Anyone who knows what a buyer will find decides for themselves when and in what context the subject comes up. A finding the seller discloses is a negotiating point; the same finding discovered by the buyer in week six is a trust problem and, as a rule, a price reduction.
When it pays
Vendor due diligence costs money and lead time. It pays above all in three constellations: in a structured auction with several bidders, because each of them would otherwise commission the same review separately; in a carve-out, because the part being sold has no history of its own and one has to be constructed; and whenever it is foreseeable that the numbers will raise questions – rapid growth, one-off effects, or a change in accounting policy.
On smaller transactions with a single interested party the effort is often not worth it. What remains worthwhile even then is internal preparation: answering the same questions once yourself before they are asked.
What the report contains
The financial part of a vendor due diligence follows the same logic as buy-side financial due diligence: adjusted EBITDA with a full bridge, analysis of revenue and margin by customer, product and region, working capital over at least 24 months, net debt including all debt-like items, and the derivation of the plan from historical performance.
Legal and tax modules usually come with it, and – depending on the sector – commercial, IT or ESG. What matters is reliance: whether and on what terms the buyer can rely on the report legally. Without a reliance letter a buyer will run its own work, and the advantage of the exercise shrinks.
What goes wrong in practice
The most common mistake is starting too late. Vendor due diligence takes six to twelve weeks, and in that time it surfaces points whose remediation takes months of its own – unclear revenue recognition, missing contracts, a balance sheet that does not cleanly depict the part being sold. Starting the process without allowing for that time buys delays inside the live process, and those are more expensive.
The second mistake is a flattering report. A reviewer who softens findings because the seller is the client makes the report worthless: buyers see it and run their own work. The value of vendor due diligence lies precisely in its independence.