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Vendor Due Diligence Transcript

Hi, I'm Graham Armitage and I'd like to talk to you about Vendor Due Diligence (VDD).

Both sides of the story! Because compelling vendor due diligence adds value to both the seller and the buyer…

VDD is becoming a clear part of 'best practice' sales processes.  But as it becomes so, there is an increasing danger that VDD becomes commoditised - a generic scope exercise conducted for the lowest cost possible.

To continue to excel in this part of our market we need to differentiate ourselves to provide compelling VDD proposition, and we are already doing on many deals.

So what makes for compelling VDD?

Well for the seller:
Compelling VDD fits as a part of the overall auction strategy adopted by the seller.

It needs to be part of a joined up approach to the issues around the sale along with the IM, the data room, the management presentation all of the other information and access provided to buyers by the seller.

Now to scope and deliver this kind of VDD requires an open and continuing dialogue with the seller and the other advisors, and a flexible approach to our work.

VDD based on a rigid scope agreed too early on when we and the other advisors don't have a full understanding of the issues around the business being sold won’t deliver this, it will likely leave gaps in the sellers approach to communicating issues to the buyer, and result in a more difficult auction and more value leakage as the process progresses.

Compelling VDD brings the VDD team's experience to the table to inform and support the seller’s auction strategy.

Now we are absolutely objective in producing the VDD report, but no bidder will thank our team for producing a VDD report on lousy data. We contribute all of our experience of what bidders will want and need to see to help ensure that the seller prepares the necessary information to allow the bidder to fully value the business, and to bank the deal.

Compelling VDD doesn't forget the basics:

A key advantage of VDD is in helping get robust data to bidders.

A recent deal we worked on took 40 iterations of carve out data before we were happy with the information. Delivering version one to bidders would have seriously impacted both the deal timeline and the ease of doing the deal for the buyer and the seller.

VDD is about working with the seller to make sure the data provided is robust.

For the purchaser:
Compelling VDD provides that right data set.

Corporate sellers often underestimate the level of detail and support required to do a deal with financial buyers.

A key task of VDD is educating management of the business being sold and helping the seller ensure they provide the right answers to allow bidders to perform their due diligence.

Compelling VDD delivers evidential support for the equity case - opportunities as well as risk.

Focusing on downsides alone is as frustrating to bidders as it is to the seller.

Buyers want to understand and bank the upsides too.

So sellers need to be pushed to produce an appropriate level of support and analysis to allow this to happen.

Compelling VDD also meets the financing banks' due diligence requirements. Now this is getting more and more difficult in the current credit squeeze. And seller’s projections need to be better built, with clear trail from the calculations in the financial model to granular, supportable commercial assumptions.

Compelling VDD provides a level playing field for bidders.

Now bidders like having the inside track, but they hate auctions where somebody else has it!  Compelling VDD provides the support to the upside - be it new commercial strategies, cost saving opportunities or synergies, to allow all bidders to assess the additional value.

So in conclusion, compelling VDD is the result of a process involving real challenge to the seller.  Not just challenge on the integrity of the financial data, but challenge on their overall approach to meeting the reasonable due diligence requirements of bidders.  We use our deal experience to do this; we help the buyer and the seller deliver faster, lower risk, better deals.

Graham Armitage
May 2008

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