Due diligence is usually something done to you: the buyer's accountants and lawyers go through your business looking for reasons to worry. Vendor due diligence turns that around. You commission a review of your own business before you go to market, so you see what a buyer will see, and can fix it or explain it first.
What it involves
- Financial review: the quality of your earnings, your adjustments, working capital and debt. This is the part that most affects price.
- Tax review: whether the company's tax affairs are in order, and any exposures a buyer would price in.
- Legal review: contracts, property, employment, intellectual property and disputes.
In larger deals the report is prepared by an independent firm, and buyers may be allowed to rely on it. That is what makes it valuable to them, and what makes it more expensive.
Why owners do it
- No surprises. Problems found by a buyer during exclusivity become price reductions. The same problems found by you, months earlier, become fixes.
- Credible numbers. An independent view of your adjusted profit makes your add-backs easier to defend.
- A faster, calmer process. When the answers are ready, the buyer's diligence is shorter and there is less time for a deal to drift.
The lighter version
For many businesses turning over £1m to £20m, a full vendor report is more than the deal needs. A practical alternative:
- ask your accountant for a sell-side readiness review of the last three years' figures and your adjustments;
- build your data room early, organised the way a buyer will ask for it;
- work through a due diligence checklist and fix what you can before you go to market.
Whichever route you choose, start before you speak to a buyer. The time to find problems is when you still have time to solve them.
Common questions
Is vendor due diligence worth it for a small business?
A full independent report is more common in larger sales and competitive processes. For many owner-run businesses, a lighter readiness review by your own accountant, plus a well-organised data room, gives most of the benefit for a fraction of the cost.
Does vendor due diligence replace the buyer's due diligence?
No. The buyer will still do its own work. A good vendor report shortens it and narrows it, because many questions are already answered.
General information to help you prepare, not tax, legal or financial advice. Rates and rules change; check the current position and take advice on your own circumstances.
