Vendor Due Diligence: What All Canadian Businesses Need to Know

Vendor due diligence. Vendor assistance. Sell-side due diligence. Defensive due diligence.

Transaction due diligence, or the concept of a buyer investigating a potential acquisition to make sure it’s in the condition represented by the seller, is a given in most businesses. But having the vendor conduct a due diligence process is less common – in Canada, at least.

The idea of sellers engaging in a due diligence process of the business to be divested has been around for a number of years in Europe and is now also more commonplace in the U.S. Which is making Canadian sellers and buyers stand up and take notice.

As transaction advisors, we often are asked questions such about what vendor due diligence is and how seriously will a buyer take a vendor due diligence report?

Also important to know is how can due diligence, as part of a divestment, help the buyer and the seller? What are the primary benefits to both buyers and sellers? And when can it be an appropriate tool for small- and mid-sized transactions?

Deciphering the Jargon

Vendor due diligence, sell-side due diligence and defensive due diligence are used interchangeably. They are similar to a buy-side due diligence but originated by the seller, focused on the business to be sold and carried out before the seller goes deep into discussions with potential buyers.

Vendor due diligence provides an independent assessment of the historical performance and prospects of the business being sold. This includes a detailed report on the business which can be used by sellers to quickly address issues identified and make their business more attractive to buyers. It can be provided to potential buyers to significantly reduce their own due diligence requirements.

Vendor due diligence is typically provided to prospective buyers on a non-reliance basis, although with a duty of care being provided to the purchaser. It is designed to present a balanced analysis of the business; anticipating questions or issues buyers may raise and alleviating such concerns where appropriate. This is completed with an end-goal of enabling a faster and smoother process to move towards a successful transaction.

Vendor assistance is a broad term to describe helping sellers prepare their business’ financial information for sale. This is typically tailor-made to the situation and designed to help the seller compile the business’ financial and operational information and key metrics in an easily digested way for potential buyers. It is typically less time consuming than a full-scale vendor due diligence exercise and it is not accompanied by a due diligence report.

Good for Buyer, Good for Seller

Vendor due diligence has benefits to both buyers and sellers, such as:

• Allows all parties to refer to a single set of credible financial numbers
• Identifies potential deal killers early – saving time for both parties
• Includes analysis of the quality of earnings in the periods driving a buyer’s valuation
• Provides a solid base for the buyer’s projections (and seller’s investment bankers if relevant)

Benefits to sellers (shareholders and management)

• Reduced risk of price chipping – valuation issues are addressed upfront
• Protects enterprise value by allowing seller to address potential issues before going to market
• Facilitates better control of the sale process
• Saves management time by reducing the time spent addressing due diligence queries and requests from multiple parties, allowing management to continue to focus on running the business at this critical time

Benefits to buyers

• Saves time and a significant portion of the third party due diligence cost
• Allows focus to be directed to critical business issues in exclusivity phase, as opposed to determining accuracy of reported numbers
• Facilitates acquisition financing by smoothing the lender due diligence process

Part two of this two-part blog addresses how some transactions benefit from vendor due diligence more than others.

Contact Johnny Earl, Managing Director, Corporate Finance, at 604.685.8408 or [email protected]