09 . 11 . 2015

M&A Vendor Due Diligence - the Value of Negotiation Preparation

09 . 11 . 2015

The Polish transaction sector has been expanding very fast over recent years. A significant number of companies change their owners or acquire strategic investors who may ensure companies’ rapid development, expansion into new markets and access to new technologies.

Change of an owner creates many opportunities, but in case of inappropriate preparation for the transaction it can also cause serious threats. How should company owners prepare themselves to maximize the benefits from the sale of an entity? The answer is Vendor Due Diligence.

Sales planning - first steps

Planning company or shares sales is a very complex process requiring many people’s involvement. Making the decision to sell is not the only thing. If the owner is thinking about selling his own business, they need, take into account various factors that may affect the transaction. And this should be done at the sales planning stage. The evaluation of the company’s actual situation is often underestimated by the seller. This situation makes us and our negotiation position weaker at the very beginning. In order to avoid this, it is important to conduct your own analysis of the company from the legal, organizational, tax and financial perspective before starting negotiations. Solid preparation of the company for the sale process will increase its value and, as a result, the transaction price, and will speed up the completion of the transaction.

What is the Vendor Due Diligence?

The sell-side, whose main purpose is to achieve the most profitable terms of the transaction, should identify potential risk factors that may affect the process of conducting and closing the sale procedure. The Vendor Due Diligence helps to do this. It serves to search for the weaknesses of the company, that could be noticed by potential buyers, even before start of the proper negotiations. The research summary contains specific tips, suggestions for changes and prospective valuation options. A solid preparation at this stage increases the chances for the most beneficial investment. The seller finds out what to expect during the transaction, both from own and the buyer’s perspective.

Benefits of Vendor Due Diligence

Vendor Due Diligence (VDD) is carried out only for the needs of the seller, which means that it takes place earlier than Due Diligence (DD). You can read more about it in the article Why VDR in due diligence process?. It can be conducted independently by the seller or with help from external advisors whose expertise allow for an objective analysis of the actual situation of the company. The internal review of the entity to be sold provides detailed information about the company and arguments for the final negotiations.

The VDD examination covers the same areas, which are analysed by the buyer as part of the Due Diligence, i.e. legal, financial, HR, IT, organizational and operational risks. It allows to discover both disadvantages of the examined elements and advantages, which are worth exposing during negotiations (e.g. a lawyer evaluates the terms in contracts and prepares the legal structure of the future transaction, a financial advisor analyses the financial situation and prepares plans for the valuation of the company). The report is structured in a way that includes most of the answers to the questions that the buyer can ask during the Due Diligence. Then the seller can control the process properly.

The key advantages of the Vendor Due Diligence are:

  • full control over sensitive documents shared with investors
  • minimization of the risk of failure of the process
  • early identification of problems that would interrupt the transaction and benefits that can improve the negotiating position
  • possibility to adjust the sales strategy with regards to known threats
  • keeping potential investors in ‘tension’ – the possibility of using suitable bargaining chips
  • time saving – quick finalisation of the transaction
  • proper preparation for the negotiation process with the interested parties

Vendor Due Diligence - how to prepare for it?

Vendor Due Diligence is not much different than the preparation of a proper Due Diligence conducted by potential investors. In order to achieve this it is necessary to collect the company’s key records, organize them properly and then share them with people responsible for conducting the analysis and presenting the conclusions to the owners or the directors. Due to the fact that the main confidential documents of the company are being analysed, it is important to take care of appropriate security standards.

Virtual Data Room vs. Vendor Due Diligence

Virtual Data Room (VDR) technology meets all the expectations of VDD, so using it is highly recommended as a best practice for conducting it. It can help to organise the transaction process already at the stage of internal preparations and to keep control over it. Sensitive documents are assembled in electronic files, in one place, well organized and available 24 hours a day, but only for authorized individuals. The company’s owner decides who has access to which documents and to what extent as well as has full control over the work provided by advisors thanks to advanced reports. Advisors responsible for VDD have a tool that allows them to analyse documents online in a structured and comfortable way. Confidential documentation, which is already available outside the company, is protected by strict security standards.

Virtual Data Room as standard in the industry

On the other hand, such preparation of the VDD saves additional work as soon as the proper negotiations with investors start. Virtual Data Room is an industry standard used for Due Diligence and negotiations with investors. At this point, everything will be prepared with the highest standards. The only thing left to do is invite investors to the system, give them appropriate access rights and start proper negotiations. More information about this can be found in the article How we can help you with Due Diligence.

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