Fast track approach
Pascal Meyer, associate with Golder Associates, discusses vendor due diligence
More and more businesses are using vendor due diligence to their advantage, particularly for those transactions that are full of twists and turns. As environmental data is gaining increasing acceptance as crucial information, environmental professionals need to understand how they can contribute to the smooth running of transactions.
Perhaps the most important element of vendor due diligence is that it allows for increased control. The vendor is able to be an active participant in the collection and presentation of the whole range of data, including the environment.
In complex transactions, VDD can significantly reduce the length of the due diligence process by providing information in an organised and logical way. This is particularly important in cross-border transactions, where the quality or sophistication of information can vary significantly. Increasingly, vendors are choosing to minimise this by presenting their own VDD report which clearly sets out the relevant information.
One instance where VDD can provide positive benefits is if the transaction involves an auction process, where it can help to speed up a sale and shorten the exclusivity period. VDD also tends to cause less management disruption than traditional due diligence undertaken by the acquirer. This is due to the fact that one team of specialists is providing information to a number of potential bidders.
Perhaps the most significant benefit is that it allows the vendors and investment bankers to retain greater control of the due diligence process and the interpretation of any findings. This helps minimise significant changes to offer prices late in the process, as the key issues have been disclosed prior to submission of bids.
These benefits make the report a valuable asset, but only if it provides a purchaser with a reasonable level of comfort, particularly when compared to any expectations that have resulted from the commissioning of the buyer’s own report.
Another potential benefit is when the deal is a complex transaction, for example cross-border or carve out. VDD can often provide an insight into the assumptions made by existing management in arriving at the operating results of the entity being sold.
Historically bidders have been rather suspicious of vendor due diligence, and have expressed concern that it minimises their opportunity to identify key issues. There are several ways that such reservations can be addressed.
It is important that work is planned with an emphasis on independence, and in the case of environmental due diligence, when one consultancy has been involved in the salient issues, it is vital that the vendor due diligence is undertaken by a completely different team.
Furthermore, the team should comprise specialists who are familiar with the requirements of financial institutions and other stakeholders who commission and rely on such work. They should apply their technical expertise, but deliver their findings in a way that other stakeholders can interpret.
Wherever possible, the bidders should be allowed to have input into the terms of reference so that any specific questions or concerns that they have are addressed. This will further reduce the amount of additional top-up due diligence necessary during exclusivity. Finally, meetings between the team who performed the due diligence and the preferred bidder can greatly reduce the concerns of the bidder and allow a forum for additional information and queries.
The way forward
There is a trend towards increased use of vendor due diligence. Corporate management and investment bankers realise the benefits that this service can provide to vendors. The reduction in time necessary to complete transactions along with the increased value that can be obtained have made the use of vendor due diligence more common.
The inclusion of non-financial aspects in the VDD can enhance the process. The inclusion of environmental, social, and integration assessments add value and credibility. All of these areas are focused on identifying risks and potential costs to the company and identifying the issues promptly.
The due diligence process is continuously evolving and this is particular true for the environmental and social aspects of reporting. Vendor due diligence is a manifestation of the increasing sophistication and higher expectations of all parties involved in the M&A market. As transactions become more complex and the demands for swifter responses increases, VDD is likely to continue to evolve and establish itself as a vital part of any significant disposal process.