What’s in a name? – Selling or buying a business on the basis of a VA/VDD/Factbook
Efficiency and your M&A process
Preparing for the sale of your business in an organised auction deal (with multiple bidders) can be stressful, time-consuming and costly. Allowing each bidder to perform in-depth, buy-side due diligence on your business from scratch, would be very hard to manage. Imagine multiple InfoRequestLists, Q&As, risk interviews, expert sessions, separate data rooms per bidder, etc…. This would take up too much of your management’s time, time which they should be using to focus on the business, which in the end is key in preserving the value of the business being sold.
That’s why many selling parties, often at the suggestion of their advisors, decide to streamline the due diligence process surrounding the bidders. This can be either vendor due diligence (VDD), vendor assistance (VA), or sometimes factbook or interview-based auto-diligence. All have common features, but each is structurally different and each has its own individual pros and cons. Let’s clarify.
Main distinction between vendor assistance and vendor due diligence
A key difference between vendor assistance and vendor due diligence is the role played and the responsibilities borne by the seller’s advisor (e.g. the legal advisor).
In vendor assistance, as the name suggests, the legal advisor assists the vendor, meaning that the work performed by the legal advisor is for the benefit of the vendor only. The legal advisor therefore can’t be considered as neutral towards the bidders. The advisor can freely discuss the legal issues they have spotted with the vendor. In the case of legal VA, it is rare that a written report will be made, as matters are mostly addressed via memos, emails and on-site factual support.
In vendor due diligence, on the other hand, even if the legal advisor has been contracted by the vendor, the legal advisor in fact has a contractual duty to the buyer although the advisor fee is paid by the vendor. Indeed, the buyer will rely on the vendor due diligence report provided by the legal advisor and decide a.o. on that basis if they wish to continue with the transaction/make an offer/close the deal. In such a case, the legal advisor must be completely impartial/neutral, as if the client were not the vendor but the buyer. There will be no room for manoeuvre when it comes to disclosing material legal issues, and less possibilities to suggest regularisations to the vendor.
The nature of the services delivered is also quite different. In vendor due diligence, the scope of work is to objectively identify issues and to qualify and quantify the risk. Unlike a buy-side due diligence report, the legal advisor will in principle not give recommendations on how to tackle the issues spotted in the share purchase agreement (SPA). The scope of the vendor due diligence report can be defined in consultation with the vendor but primarily it will be up to the corporate finance advisor.
In vendor assistance, the scope of assistance is more flexible and depends on the requests made by the vendor. It could simply be about managing the data room (which legal contracts go in the data room?, is the information complete?, etc…), helping management to answer questions from the buyers, assisting the client with the negotiations and/or closing for example.
| Vendor assistance | Vendor due Dilligence | |
| Legal advisor’s position | Initial appointment: the legal advisor works for the vendor Final client: vendor The legal advisor works for the benefit of the vendor only The legal advisor is not neutral |
Initial appointment: the legal advisor works for the vendor but with the Buyer’s issues in mind Final client: buyer The legal advisor works for the benefit of the vendor and the buyer The legal advisor provides an independent view |
| Nature of services | Consultancy-based service Scope is defined by the client For example, management of the data room, management of the DD process with buyers, assistance with SPA negotiation and closing |
Product-based service Scope is defined by the legal advisor together with the seller For example, drafting of an in-depth vendor due diligence report on financial, tax, legal and HR matters |
| Deliverables | Flexible, depending on the client’s needs | Defined product (extensive/detailed report) Report is available to the prospective purchasers but also to banks and insurers Includes reliance |
Advantages of requesting vendor assistance or vendor due diligence
The main benefit common to both vendor assistance and vendor due diligence is that they help the vendor to prepare and anticipate. Indeed, such processes help anticipate and identify the issues that could be important for potential buyers. Spotting any issues early in the process enables the vendor to tackle the issues upfront and to preserve the value of their business.
In addition, vendor assistance or vendor due diligence enables our clients to communicate focused, relevant and consistent information to potential buyers. In general, this helps to attract more prospective buyers because they already have the information available right away. Such processes also include the benefit of having already prepared a quality data room which will potentially be used by prospective buyers at a later stage.
| Vendor assistance | Vendor due diligence |
| Triggers interest faster from interested parties to become candidate buyers | Buyers will in principle be able to express genuine interest to continue in the process quicker certainly if the VDD is of good quality |
| Includes validation of source data | Includes a deeper validation of source data |
| Offers early warning to sellers on possible issues | Offers early warning to sellers on possible issues but less influence on regularisation possibilities |
| Helps management in a practical manner | Gives management insights in key drivers of the business |
| Only one due diligence process | |
| Accelerates and secures the completion of the transaction | |
| Reduces potential barriers for buyers to enter and remain in the auction process – limited upfront investment by the buyers | |
| Possible contractual duty to the buyer (see further) |
Release and (non-)reliance
As you can see, these processes have the advantage of saving time and effort but it goes beyond that. As a seller you may convince even more candidate buyers to join the auction process in the case of vendor due diligence if the advisor issues a release and reliance letter. This means that the advisor who prepared the report engages (‘reliance’) its contractual liability directly to the buyer (albeit often with liability caps ranging between 1 to 10 times the fee).
(Legal) factbook
In some auction processes, the advisors (usually legal) are requested to compile a factbook. This is not a separate category rather a reporting style under the vendor assistance type. It is very factual and does not include issue spotting or recommendations, hence it can be advantageous in terms of efficiency but buyers will generally still prefer to perform due diligence.
Chinese walls between VDD and SPA
Lastly, we cannot close this newsflash without mentioning independence standards and good practice. It is not an issue for a legal advisor team to switch from providing vendor assistance to vendor due diligence services to the same client, as long as both parties understand that in vendor due diligence, the advisors drafting the report must be independent. Advising on the share purchase agreement while having delivered vendor due diligence is more problematic, given the shift from a neutral to a partial position towards the vendor.
Do you want to sell all or part of your business and need some hands-on advice? Don’t hesitate to contact us.
