Vendor due diligence is the procedure private businesses undertake when their assets are put up for sale or when they are being sold. Vendor due diligence, unlike the buy-side type of due diligence, is performed as per the seller’s request.
Usually conducted by independent third parties, comprehensive reports of the financial stability of the companies are produced and made readily available for the review of potential investors. The legal and financial teams of potential buyers will review the reports from the vendor due diligence in order to find out the prospects and financial solvency of the business that is being sold. Effective screening of the vendor can help in alleviating concerns that surround the vendor prior to the acquisition.
Process of UAE Vendor Due Diligence
At the highest level, VDD or vendor due diligence involves a process which contains stages such as the following:
- Stage 1: liaising of the vendor with an expert or third party in conducting the vendor due diligence. The process will commence prior to the company assets or target business being put up to the market for sale.
- Stage 2: reports for vendor due diligence are then prepared. The reports will be sent to the interested buyers for review. After the reports are sent, the vendor will then allow the potential buyers in carrying out their due diligence on their own.
- Stage 3: highly dependent on the kind of complexity of the sale, the potential buyers may perform investigations with the management or administration of the target business.
- Stage 4: as soon as the sale is finalized and completed, the purchaser will then receive the final report from the vendor due diligence to which it is legally bound.
Benefits of conducting a thorough UAE vendor due diligence
The primary advantage of conducting vendor due diligence in UAE is it boosts the success probability of an acquisition that is being proposed by instilling credibility and buyer confidence in the potential of the business. A report from a thorough vendor due diligence provides all prospective buyers with a much clearer view of the business prior to starting negotiations.
Vendor due diligence can enable a seller in addressing and determining problems that are related to the assets of business early on. This can result in a much higher price and the speeding up of the process in its entirety.
By providing draft reports that disclose any material risks or liabilities that are found, the vendor will be able to prevent bids being later dropped or negotiated down from the uncovering of issues during another due diligence. If there are several bidders that are interested in a target business, it’s very prudent for the target business to come up with reports prior to the due diligence teams of potential buyers conducting their own commissioned investigations.
This will most definitely help in the reduction of a number of questions and concerns from buyers’ financial and legal teams, making better use of the time of the administration or management of the business for sale. As all prospective buyers have access to a single report from vendor due diligence, the bidding process becomes very competitive. Also, this can lead to an increase in the value of the target business’ acquisition.
Access to important information of the business early in the process of acquisition can allow the buyers to save company resources for the buy-side type of due diligence. Buyers will also be able to make informed buying decisions if there are significant issues that are identified.
Read more: Why Vendor Due Diligence in UAE is Important
A Checklist for Vendor Due Diligence UAE
The contents of the reports from vendor due diligence can vary according to the nature or type of the target business being audited. But, the due diligence reports will have contents that remain the same across most industries.
The main kinds of information that are typically presented in vendor due diligence reports include:
- A full review of the historical financial information of the vendor
- Debt – the vendor has to be transparent regarding any contingent liabilities that weren’t disclosed in the business’ financial statements
- Risk evaluation – it would encompass the liquidity, capital structure, and a detailed analysis of the business’ growth
- Quality of the income – this is a summary of the calculation of cash flows. Free cash flows refer to the measure of cash flow businesses produce following the deduction of expenses on assets
- Other issues – these are the ones that may prove to be exclusive onto the industry where the target business operates. This can also include complex international aspects that can have an impact on the taxation or transfer pricing, changes to regulations in the industry that the vendor belongs or influence of relationships of parties involved
Find more: What are the Due Diligence Activities involved in Merger and Acquisition Transaction?
Extra information that can be included:
- Intellectual property
- Material contracts
- Customers or sales
- Strategic fit
Contact us here in Farahat & Co for more information.