Once the decision has been made to sell all or part of your business, there are a number of key decisions to be made. The first will be the appointment of a sale advisor. The next consideration will be whether vendor due diligence will be completed. Whilst vendor due diligence is a significant upfront cost that is incurred regardless of the success of the sale, the increased credibility of the information memorandum, reduced business interruption, and ability to maintain live bidders will increase your control during negotiations.
Key benefits and concerns with respect to the completion of vendor due diligence are considered further below:
The firm completing the engagement may not initially be seen to be independent as it has been engaged by the vendor. Whilst its obligations are to the vendor, reports do not express an opinion and only report on facts. As the bidder will engage their own advisors to review the target business, the existence of the report will enable the process to be completed quicker, and potentially maintain additional bidders further into the sales process prior to exclusivity. Typically the report is ‘signed over’ to the purchaser giving them full reliance on the vendor due diligence report.
The vendor due diligence can be seen by vendors as an unnecessary and additional cost when completing the sale process as the bidder will complete their own due diligence as part of the acquisition. However, by completing the process prior to commencing the sale process it may also reduce any additional costs in preparing and compiling information to meet bidder requirements.
And ultimately, if it enables the deal to be completed on terms more favourable for the vendors, it is viewed as a benefit.
We have considered two case studies for transactions in which we have been involved that demonstrate the possible extremes of the benefits and consequences of undertaking vendor due diligence prior to sale.
Case Study 1
PKFCF was engaged to complete VDD on client.
Review of forecasts indicated forecast earnings were potentially understated as they were prepared using high level growth assumptions only.
We assisted the client with the development of a more detailed and rigorous forecasting process that resulted in an increase in forecast revenue and earnings. The revised forecasts withstood the prospective purchasers due diligence procedures, and were subsequently proven to be accurate with actual performance meeting the forecast.
The valuation of the target reflected the increased earnings resulting in increased sale proceeds for the vendors.
Case Study 2 - No VDD
Bidder submitted offer subject to satisfactory completion of due diligence.
Limited financial function of the business resulted in delays in the provision of information and completion of acquisition due diligence.
Change in legislative environment had potential impact on earnings of business.
Bidder walked away.
In our opinion, the benefits to value, timeliness and the probability of transactions being completed will be significantly greater than the expense of completing the due diligence assignment. In our option, the importance of the process is even greater for businesses with less sophisticated finance functions when commencing a sale process. Vendors and their advisors can negotiate with the engaged firm completing due diligence to produce a tailored report that will address the key risks and concerns of bidders whilst balancing the cost of delivery.
Matt is a Manager in the PKF Corporate Finance team.
He has ten years experience in the accounting industry in Corporate Finance and Audit and Assurance across a diverse range of industries with a focus on mining services and the power industry and has also worked with clients from the finance, manufacturing, property and retail sectors.
Matt has strong analytical skills and specialises in developing financial models for forecasting and feasibility purposes and project evaluation.