Disparity Between European & American Markets on Vendor Due Diligence

Despite its widespread acceptance in European markets, the U.S. markets continue to shut it out. This situation is most likely due to the indifference of sellers, an odd state The success of every relationship depends on the trust between the two parties. This scenario holds even in business relationships. To build a strong relationship with another business or with a vendor, the buyer needs to have complete information about anything that impacts the business prospects.

Vendor due diligence does precisely that. Vendor due diligence is a way for businesses to vet vendors and identify potential risks, conflicts of interest, and more before signing a contract with the vendor.

Although vendor due diligence is a standard operating procedure in the European market, the American market is still reluctant to catch the trend. 

What is Vendor Due Diligence?

Vendor due diligence is an in-depth financial report that informs the business of everything they need to know before entering into a contract with the other party. It covers the legal, accounting, and any other business aspect relevant to the current transaction.

Vendor onboarding gets performed typically at the start of a contractual relationship. The process can also get repeated if there is a change in the contract’s scope periodically for long-term relationships.

The vendor onboarding at AuthBridge is a five-step process that starts with the registering of the application. It is then followed by a real-time verification of the identity of the business entity and its owner. Then we verify the bank details and digital address of the office. The final step is to accept the terms and conditions. 

Why Is Vendor Due Diligence Important?

The vendor due diligence report has been established as pivotal before the buyer signs a transaction contract with the seller. Here are certain corresponding benefits to a prospective buyer:

A Road Map to Potential Deterrents

A well-devised VDDR provides bidders with a road map to possible issues that might materially interest them. Bidders can more rapidly assess whether they need to watch out for red flags that might turn out to be deal-breakers.

VDDR might also reveal issues for which the buyer might require specialised accommodation. This accommodation could be via the purchase cost, structuring solutions, compensation, or a combination.

Deeper Insights into Business Operations

VDDR provides the buyers with the opportunity to participate in a reasonable, well-organised, and impartial diligence process.

The bidder can amass sufficient assurance with its knowledge of the books of the target business to be motivated to put forth its finest offer.

The bidders remain secure, knowing that the disclosure schedules to the definitive purchase agreement are implausible to harbour surprises.

Better Imparting of Instructions to Advisors

A thoroughly prepared VDDR enables bidders to instruct their advisors more efficiently when prioritising the most concerning issues to them.

A narrowed and planned approach to diligence enables bidders to control their expenditures further. This is because their advisors can now engage in confirmatory in contrast to comprehensive diligence.

Fair Competition Amongst Bidders

In the case of vendor-controlled diligence processes, the bidders submit follow-up queries in writing and, under certain cases, have limits imposed on the number of such questions.

The bidder catalogues the follow-up inquiries and prepares a unified response shared with all potential buyers. Bidders stay assured that there is fair competition amidst the bidders for developing an impression of the target business.

Difference Between European and American Acceptance of Vendor Due Diligence

While the European market practice has widely implemented VDDR as a mundane process and an anticipated step of the private equity sales process, the American markets are yet to embrace it on a massive scale.

In the beginning, the vendor, as it prepares for the sales process, employs accounting, legal and other relevant advisors to design draft VDDRs. These draft reports are made available to interested buyers on a non-reliance basis.

VDD reports are meant to facilitate buyer’s due diligence and are beneficial in leveraged transactions since they present the financing sources with an appropriate picture for streamlining the lender diligence.

Despite offering similar advantages and delivering bidders the same head-start in understanding a target’s business, the adoption of VDD remains an alien concept for the United States.

The only potential reason for its halted adoption could be that the ethics rules liable to lawyers in the U.S. forbid them from capping the amount of their accountability for malpractice. 

A U.S. law firm that contractually allowed a bidder to follow its due diligence report would be accountable, with no limitation, for any losses sustained by the buyer. These could result from mistakes or omissions encompassed in the VDDR.

Final Words

A vendor due diligence report provides insightful analysis and judgment of various aspects of the target business, such as legal, monetary, or operational performance. It also helps identify any risks that might tag along with purchasing a company.

Due to its substantial benefits, VDDR remains a crucial asset in transactional agreements. It ensures maximum profitability to the buyer and provides an equal level of competition.

of affairs provided that several private equity firms also work overseas and use the practice extensively when selling their non-US portfolio businesses.

In this article

Join the Conversation