Vendor due diligence, explained simply
In a competitive process, running several full diligence exercises in parallel is inefficient and disruptive. One independent report on the same facts lets all bidders price on a common basis, and reduces the burden on management.
The advisor’s liability to the buyer is normally capped in the reliance letter, so the buyer’s own confirmatory work remains important.
One report, several bidders
IllustrativeThe reliance letter extends the advisor’s duty of care to the winning buyer and its lenders.
Vendor due diligence and sell-side QoE
| Sell-side QoE | Vendor due diligence | |
|---|---|---|
| Scope | Mainly earnings | Often finance and tax, sometimes commercial or legal |
| Reliance | Usually limited | Winning buyer and lenders, under a reliance letter |
| Common in | US lower and middle market | UK, Europe and larger auctions |
Worked example
Alder Creek’s owner runs an auction with six interested buyers. Instead of six diligence teams interviewing the finance staff, the owner commissions a VDD report. All six bidders review it and four submit offers. The winner’s lenders receive a reliance letter, and the buyer’s own confirmatory work takes two weeks.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
VDD speeds the process, keeps the seller in control of how issues are presented and reduces disruption to the business.
Red flags
- An advisor that is not independent of the seller
- An outdated reporting period
- Reliance letters with a very low liability cap