Growing trend for vendor due diligence

As trade buyers return in greater numbers to the M&A market, there is increasing competition to buy the best assets. This has led to a trend amongst sellers across Europe to conduct their own due diligence. They are hiring advisers to conduct a thorough analysis of the business to be presented to the bidders in much the same way as the seller of a property presents a 'homeseller's pack' to interested buyers.

Traditionally, it is the role of each interested purchaser to hire lawyers and accountants to conduct due diligence on the company they want to buy. So why are the vendors starting to bear this expense instead?

The ultimate aim of vendor due diligence is a quicker auction process and often a better price from the sale, especially as such a process allows a seller to uncover potential problems earlier, so they can rectify them or factor them into the asking price. The seller may also be able to keep the sale confidential for longer, as fewer people are coming in to carry out their own research into the business.

The process of each bidder conducting their own due diligence can be disruptive, especially if there are several people undertaking it at the same time. As well as proving more efficient for the seller, vendor due diligence is also advantageous to the buyer as it lowers the costs of looking at the company. In itself, this could attract a greater number of potential buyers for the seller to choose from.

As a result of all potential bidders being presented straightaway with a full rundown of the business, bids for the company are unlikely to change. The sale process becomes streamlined, and is less cumbersome and disruptive for management. Although the seller takes on a lot of the costs of the transaction, they can ultimately expect to recoup them through a higher sale price.

There is a conflict of interest question, though, when a vendor is considering undertaking their own due diligence. No vendor wants negative information about their company to be made public, and when the accountant is being paid by the vendor, not the purchaser, it is reasonable to question the accuracy of the information eventually provided. The way around this problem is to use a credible accountant, where you are relying on the firm's reputation to tell their client (the vendor) that they may or may not like the outcome of the process.

There have been some high profile cases recently of trade sales that have involved extensive vendor due diligence. For example, the sale of Saga, the over-50s financial services and travel provider, to private equity house Charterhouse Capital Partners for £1.35bn in 2004. Advisers to the company justified the expense of the due diligence because such a process was necessary were they to go for a float. Charterhouse, there fore, got much of its legal and accounting work handed to it. Ultimately, it is this convenience and efficiency for the buyer that can enable vendor due diligence to command a higher selling price for the company.

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