What is vendor due diligence, and do I need it before selling?

Vendor due diligence is the diligence a seller commissions on itself, before any buyer does. Done well, nothing the buyer's advisers find is news. A seller needs it when a buyer's diligence would find something the seller has not yet found.

What will a buyer's diligence look for?

A buyer's advisers work through the financial, legal, tax and operational streams beside the commercial one. The questions they ask of a business for sale recur:

• Quality of earnings. What the business earns once one-offs and the owner's costs are taken out.
• Quality of the numbers. Whether monthly figures are consistent, and whether a system change breaks the comparison between years.
• Customer concentration. How much revenue rides on a few customers, read against how the business reaches them.
• Trading against forecast. Whether the business hits its forecasts, including during the sale.
• Contracts. Whether the large ones are current and signed, and what happens on a change of owner.
• Working capital and capital spending. What the business needs to keep trading at the level in the plan.

What does finding it first change?

A risk the seller raises is a fact. A risk the buyer finds is a finding, and it is priced. That is the case for vendor due diligence.

Each finding then gets a prepared answer. It is fixed, evidenced away, or disclosed with context. A seller who has not looked learns the findings from the buyer. By then the buyer holds the pen.

A commercial vendor report builds its evidence in order. The market comes first, then the growth of each segment, then the competitors. The business itself comes last.

When should it happen?

Vendor due diligence needs time before the sale opens to fix what it finds. Fixing those findings takes months. A data room, a briefed list of reference customers and the advisers come in the final months before a process.

The seller check describes a ready data room in one sentence: "Vendor DD done, gaps fixed, and a list of large, friendly customers briefed and willing to take a buyer's call."

The next step

The seller check asks the buyer's questions first, so you can see what a vendor report would have to answer. No email before your result. No sales call after it. No list. Delete on request.

Related questions

• What is exit readiness?
• Why did a due diligence report not save the deal?
• Is an earn-out a good idea for the seller?

This page is drawn from the seller check's grid and recommendations, the exit readiness article and an article on the sale plan, on onestepright.