What is Vendor Due Diligence (VDD)?

Explanation of Vendor Due Diligence (VDD)

Vendor due diligence is conducted before a business sale or investment process begins. Instead of each potential buyer conducting their own initial investigation, the seller commissions advisers to prepare a detailed analysis of the business. This typically covers financial performance, historical results, key risks, and operational factors.

The resulting report is shared with potential buyers during the sale process. This allows buyers to review consistent information about the business while supporting more efficient and informed discussions during negotiations.

VDD is commonly used in mergers and acquisitions processes involving privately owned companies. The analysis often focuses on financial information such as revenue quality, profitability, working capital trends, and net debt position.

Preparing a VDD report can help sellers identify issues before approaching the market, clarify the financial position of the business, and provide a structured information package for potential buyers. It can also support a more organised due diligence process once formal negotiations begin.

Key characteristics of vendor due diligence (VDD)

Key characteristics of vendor due diligence include:

• It is commissioned by the seller before a business sale process begins.
• The review is usually performed by independent financial or corporate finance advisers.
• The report is made available to potential buyers during the transaction process.
• It typically analyses financial performance, risks, and operational information.
• The process can support a more structured and efficient sale process.
• VDD is commonly used in private company mergers and acquisitions transactions.

How vendor due diligence (VDD) works

Vendor due diligence generally follows a structured process:

1. The seller appoints advisers to perform an independent review of the business.
2. Financial and operational information about the company is analysed.
3. A due diligence report is prepared outlining key findings and financial insights.
4. The report is shared with potential buyers during the sale process.

Example of vendor due diligence in practice

A privately owned UK manufacturing company plans to sell the business. Before approaching potential buyers, the owners commission advisers to prepare a vendor due diligence report reviewing revenue trends, profitability, and working capital. The report is shared with interested buyers to support the sale process.

Related terms

• Due diligence
• Mergers and acquisitions
• Business valuation
• Share purchase agreement
• Data room
• Financial due diligence
• Enterprise value

Common misconceptions about vendor due diligence (VDD)

Vendor due diligence does not replace a buyer’s own due diligence process.

VDD is not limited to large corporate transactions and may be used by privately owned businesses.

A VDD report does not guarantee that a transaction will complete.

Frequently asked questions about Vendor due diligence

What is vendor due diligence?

Vendor due diligence is a review of a business commissioned by the seller before a sale process begins. The analysis is typically prepared by advisers and shared with potential buyers to provide structured financial and operational information about the business.

Why is vendor due diligence used in a sale process?

Vendor due diligence provides potential buyers with consistent information about the business and can help streamline the transaction process by reducing duplication of initial investigations.

What does a vendor due diligence report include?

A VDD report commonly includes analysis of financial performance, revenue quality, profitability, working capital, net debt, and key operational risks relevant to the transaction.

Does vendor due diligence replace buyer due diligence?

Vendor due diligence does not replace buyer due diligence. Potential buyers may still conduct their own detailed review of the business before completing a transaction.

When is vendor due diligence carried out?

Vendor due diligence is typically performed before the business is formally marketed for sale, allowing the seller to prepare information that will be shared with potential buyers during the transaction process.