While it is common for companies to do due diligence when looking to make an acquisition, vendor due diligence, or sell-side due diligence, is less so. So, what is it, and why does it matter?
Vendor due diligence (VDD) is usually initiated by a company that is looking to be purchased or looking to sell off a specific portion of its business. In the latter instance, VDD, or vendor assistance as it’s also known, can also provide customized assessments that assist the company in divesting its business successfully.
Vendor due diligence can be conducted on any or all of the common four categories (commercial, technical, legal or financial). By doing so, the seller is able to expedite the DD process, ensuring that they not only reduce the time their resources have to be dedicated towards the process, but also gives themselves the opportunity to address any concerns that may arise.
At Penser, we’ve supported many clients with commercial due diligence and technical due diligence within the digital banking and payments industry. As specialists, we have supported both buyer-side due diligence as well as vendor assistance for companies that are looking for a buyer or are looking to restructure its portfolio of services.
Commercial vendor due diligence
When assessing a company’s value to a potential acquirer, we assess the company in the key segments below:
- Market drivers – We build a comprehensive picture of the overall market in order to assess how the company is positioned. This takes into account not only how the market is growing and developing, but also regulatory changes that might impact the market, and how the company’s business plan and projections fit into this landscape.
- Competitive landscape – Understanding the company’s key competition, and how they are positioned relatively, provides important detail to our analysis.
- Customer evaluation – We evaluate the company’s customer, and whether their solutions and experience match with the customer’s expectations and the industry standard.
- The business plan – We assess the feasibility of the company’s business plan and their KPIs and customer economics. We also take into account the risks involved from both an internal and external perspective.
These segments allow us to build a comprehensive report on the prospects and potential value of the seller. This allows the seller to offer a more compelling proposition to potential buyers.
Technical vendor due diligence
When assessing the technological value of a seller, we do a deep-dive analysis on the seller’s underlying technology and infrastructure. Similar to commercial due diligence, we focus on five key segments:
- Scalability – Assessing the viability of the seller’s technology to handle increases in volume and how adaptable it is to rapid growth.
- Security and compliance – We ensure that the seller’s technology takes the necessary security measures to prevent attacks from bad actors, and also compliant with all legal and regulatory requirements.
- Infrastructure – The seller’s platform is evaluated for both its robustness as well as its adaptability, allowing it to handle changes to existing technologies and the inclusion of new technologies.
- Business resilience – We assess the seller’s ability to handle disasters and deliver service despite external obstacles.
Due to its more specialized nature, technical due diligence is best executed by firms with considerable domain experience in the field.
Is vendor due diligence the right fit for you?
It depends on your company’s situation and strategy. However, here are some questions you can ask yourself to find out –
- Is your company looking to carve out specific business units or sell existing entities?
- Is your company in the process of realigning its operations, or changing focus?
- Is your company looking to restructure its portfolio?
- Are you under pressure to return value to your shareholders?
- Are you looking for ways to improve dropping financials?
What are the benefits of initiating vendor due diligence?
A vendor due diligence report can add substantial value for the seller. There are three major benefits:
- VDD provides the seller control over the type and scope of information. It allows the seller to manage the pace and initiative through the sale and reduces uncertainty and risk for buyers.
- A VDD report providers potential acquirers with more clarity about the business while reducing the necessity of the acquirer having to do as much of their own due diligence work, unless they choose to.
- Vendor assistance allows sellers the option to identify and address issues raised by the analysis quietly and privately. This not only protects the company from potential exposure, but also can help them avoid any adverse impact to their valuation.
- As the seller initiates the VDD exercise, they can minimize disruption to their business by containing the time and effort that designated employees will need to dedicate to the due diligence effort by providing a single comprehensive report that all potential acquirers can refer to.
- Finally, a VDD report allows for faster execution of the investment process by reducing the overall risk and ensuring a faster transfer of ownership.
At Penser, we have developed the industry expertise to be able to ensure that our clients are able to provide a comprehensive due diligence report to potential acquirers in the banking and payments sector.