How vendor due diligence prepares the sale of a company: VDD report, reliance letter, weaknesses identified early and a stronger position in the bidding process.
BRANDAUER Rechtsanwälte
Salzburg law firm for corporate, company and transaction law
Every transaction is handled by a coordinated team of lawyers, legal staff and specialists. In company acquisition matters we look at structure, contract, tax and liability together.
Due diligence is seen by many as a pure buyer topic. Yet the seller too can take the review of its own company into its own hands before putting it up for sale. This sell-side review, the vendor due diligence, reverses the usual order and gives the seller control over the process.
This post explains what vendor due diligence achieves, how the associated VDD report is structured and which advantages it brings in a structured bidding process. The focus is on the early identification of weaknesses, the reliance letter for bidders and the interplay with the data room, disclosure and the warranty catalogue.
From a lawyer perspective vendor due diligence is above all an instrument of negotiation. Whoever knows their own risks before the buyer finds them negotiates from a stronger position. It is typical on the exit of a financial investor and in business succession.
Answer one or two questions on the process and your own review. You receive an initial classification of the most important steps before the sale starts.
Already know you want to get in touch? Go straight to the enquiry form.
A bidding process puts buyers under competition and strengthens your position. A sell-side review creates the basis for this, because all bidders receive the same reviewed information base.
Even without competition a sell-side review strengthens your position. You know your own weaknesses before the buyer finds them and can clean up risks in advance or deliberately disclose them. This speeds up the buyer review and reduces later price reductions or claims from the warranty catalogue.
An orientation is offered by our post on the due diligence checklist.
If the bidding process and the clean-up are prepared, the sale is well set up. Check in addition the structure of the data room, the completeness of disclosure in view of the later warranty catalogue and the question whether bidders are given a VDD report with a reliance letter.
A short legal accompaniment ensures that the process carries your negotiating position.
If weaknesses remain open, they threaten to surface as a red flag in the process and to weaken your position. Catch up the sell-side review: a systematic review of your own documents, the clean-up of solvable points and a clear strategy for disclosing the remaining risks.
Have the sale prepared before the first interested party looks into the data room. A problem once discovered is hard to recapture.
In vendor due diligence the seller reviews its own company, as a rule with the help of advisers, before the sale process begins. The same areas are examined as in a buyer review: legal relations, finances, taxes, employment law, contracts and intellectual property rights. The result is recorded in a report, the VDD report or fact book.
The purpose is twofold. On the one hand the seller obtains a clear picture of its own situation, including the weaknesses a buyer would find in its review. On the other hand a structured document emerges that serves interested parties as a reliable information base and shortens the later buyer review.
How such a review is structured in content is shown in our post on the due diligence checklist. Vendor due diligence follows the same system, only from the seller perspective.
The greatest advantage lies in process control. Whoever has several interested parties compete in a structured bidding process, an auction, wants to offer them all the same reviewed information base. The VDD report does exactly that. It provides competition on an equal footing and thus supports the achievable price.
At the same time the seller identifies weaknesses and red flags early and can clean them up before the sale or deliberately disclose them. A problem discovered only by the buyer almost always leads to a price reduction or to claims in the warranty catalogue. A risk cleaned up in advance or addressed transparently, by contrast, loses much of its effect.
Speed is added to this. A good vendor due diligence shortens the buyer review, because many questions are already answered. This keeps the process tight and reduces the danger that a long review stalls the transaction. How the individual steps connect is set out in the post on the warranty catalogue in the purchase contract.
The VDD report is drawn up by the seller advisers. For a bidder to be able to rely legally on the report, it needs a reliance letter. With this letter the author extends the liability for the accuracy of the report to the bidder, usually against a fee and to a limited extent. Without a reliance letter the report is for the bidder only non-binding information.
The VDD report does not replace the data room but supplements it. The matters described in the report must be evidenced by the documents in the data room. A clean alignment of report, data room and disclosure is therefore important, especially in view of the later warranty catalogue.
What is disclosed in the VDD report and the data room the seller can later hold against the buyer. Disclosed risks are as a rule excluded from the warranties. Correct disclosure is therefore a central tool of risk allocation. An initial assessment is provided by our M&A transaction risk profile.
Both reviews examine the same company but pursue different aims. The overview shows the most important differences.
| Criterion | Vendor due diligence | Buyer review |
|---|---|---|
| Commissioning party The seller | Advisers on behalf of the sell side | The buyer and its advisers |
| Timing Before the sale process | Preparation of the auction | After access to the data room |
| Aim Process control and position | Identify and clean up weaknesses early | Uncover risks of the target company |
| Result VDD report or fact book | Structured information base for bidders | Internal review report for the buyer |
| Effect Strengthens the sell side | Competition on an equal footing | Basis for price and warranties |
Both reviews do not exclude each other. The buyer also reviews independently where a VDD report exists, but in a more targeted and faster way.
Caution with incomplete disclosure: A VDD report that conceals weaknesses does more harm than good. If the buyer discovers a concealed risk, trust in the entire process suffers and the warranty catalogue becomes expensive. Disclose risks deliberately and completely. Have the report, the data room and the warranties aligned. Booking an initial consultation (72 euro) can quickly bring clarity.
Vendor due diligence is typical on the exit of a financial investor. A private equity fund selling a portfolio company through an auction wants to steer the process tightly and use the competition among bidders. A professional VDD report is here almost standard.
In business succession too a sell-side review suggests itself. Whoever hands over their life work knows the company inside out but has rarely dealt with the legal and tax weaknesses from a buyer perspective. Vendor due diligence creates clarity here and avoids nasty surprises in the sale process.
In any case the sell-side review should be aligned with the start of confidentiality and the letter of intent. How the entry into the transaction is to be legally secured is covered in the post on LOI and NDA in a company acquisition.
In vendor due diligence the seller reviews its own company before the sale process and makes the result available to interested parties. In the buyer review the buyer examines the target company after access to the data room. Vendor due diligence strengthens the sell side and shortens the buyer review, but does not fully replace it.
The reliance letter allows a bidder to rely legally on the VDD report. The author of the report thereby extends its liability for accuracy to the bidder, usually against a fee and to a limited extent. Without a reliance letter the report is for the bidder only non-binding information without a basis for claims.
Yes, an open presentation is sensible. Concealed risks are usually found by the buyer anyway and then damage trust in the entire process. A deliberate and complete disclosure takes the edge off a risk, because disclosed matters are as a rule excluded from the warranties and do not lead to later claims.
Which documents and risks to observe in the review of the company.
How disclosure in the sale process limits the warranties.
How the entry into the transaction is legally secured.
Our focus page on reviewing the target company before the purchase.
When buying a company, structure, review and contract decide. Call us directly or send an email, callback within one business day.
Address
BRANDAUER Rechtsanwälte GmbH Giselakai 51 5020 Salzburg
Phone
+43 662 6280000