What is Vendor Due Diligence?

VDD is a proactive process where you, the seller, commission a detailed report on your business. It can cover all or some of the traditional areas of due diligence including financial, tax, legal, commercial and technical. Conducted by independent advisors, these reports are shared with potential buyers during the sale process. Exactly which areas are covered, and when and to whom these reports are shared, is a matter of strategy specific to your transaction.

A Brief History of VDD

VDD emerged in the early 2000s as private equity and corporate acquisitions grew more complex. Buyers demanded deeper insights, slowing deals and increasing costs. Sellers began using VDD to take control, providing transparent data upfront to accelerate negotiations and, importantly, eliminating late surprises. By the 2010s, VDD became a standard tool for mid-market deals. As with all deal trends, VDD is now finding itself increasingly prevalent further down the deal size spectrum and should now be considered by any serious seller.

Benefits of VDD For SME Owners

Investing in VDD offers multiple upsides:

• Early Issue Detection: VDD uncovers potential red flags – like tax discrepancies or contract gaps – allowing you to fix them before buyers are aware, avoiding deal delays and erosion of buyer confidence.

• Drives Competition: A robust VDD report signals intent and transparency, attracting more serious buyers and fostering competitive bidding, which can boost your sale price.

• Shortened Exclusivity Periods: All but the most aggressive sales process will require that a period of exclusivity is granted to your preferred bidder. However, exclusivity is risky for a seller as competition is lost and your exposure to a ‘price chip’ is increased.

Who Pays for VDD?

On a successful deal, market practice has for a long time been that VDD is paid for by the winning buyer. However, we have seen some push-back in recent years with some buyers insisting VDD is a seller cost. Establishing who pays should be part of competitive bids.

The Downsides to Consider

VDD isn’t without risks. The upfront cost, typically ranging from £100,000 to £200,000 depending on business size, report scope and complexity, is a significant investment. Worst-case scenario? You complete VDD, pay the fees, and don’t receive an acceptable offer. This risk is real, especially if market conditions shift or your business faces unforeseen challenges.

Is VDD Worth It?

For SME owners, VDD is a calculated bet. The costs and effort are tangible, but the payoff – higher offers, faster deals, and fewer surprises – can be substantial. By presenting a transparent, well-prepared business, you position yourself as a serious seller, ready to maximise value. If you’re committed to selling and believe in your business’s potential, VDD could be the strategic edge you need.

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Jim Shaw is Founder & CEO of Shaw & Co.

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