2019 M&A Forecast - Vendor due diligence continues to climb
There has been a marked increase in Vendor Due Diligence (VDD) on deals over the last 12 months, fuelled in part, by the increase in bidder processes. There is also a healthy amount of scepticism from clients when the idea of a VDD is first proposed.
As with many things, the usefulness of VDD depends on the circumstances.
Recently, we have seen more bidders reluctant to conduct meaningful due diligence during pre-bid phases. The VDD exercise can solve that particular problem. In these circumstances, there is no doubt that well-timed and well conducted VDD helps maintain momentum and attracts buyers who may otherwise lose interest when faced with a multi-bid situation.
However, when looking to sell to a large corporate with a cautious approach and a big M&A budget, there may be less value in conducting VDD. In one recent transaction, we conducted a full VDD exercise and produced a comprehensive report, but the buyer elected to conduct its own detailed exercise in addition.
We expect VDD to be used to a greater extent in the coming year as the tide of processes continues. With this in mind, below are some key lessons to be gleaned from recent experience:
- Start early. One big advantage of VDD is that it allows you to identify issues and fix them before you start a sale process. We often see VDD starting too late to take advantage of this key benefit.
- VDD should be an ‘all or nothing’ enterprise. There is limited value in reduced scope VDD because bidders (and their financiers and insurers) will still want to see all the bases covered (meaning they still have to spend money to bid).
- Match materiality thresholds for VDD with expected claims thresholds in the sale agreements. Buyers (and in particular, their insurers) don’t like materiality thresholds that are in excess of the likely minimum claim amounts – this raises the spectre of items being missed that may be large enough to constitute a claim.