Traditionally, due diligence is conducted from the perspective of the buyer. This seems to make the most sense given that it is the buyer that inherits the risks and commercial potential of the business they acquire.
However, over the last few years sellers have begun to acknowledge the potential of vendor due diligence – sometimes referred to as sell-side due diligence. By flipping due diligence around, sellers can stay one step ahead and increase the value and appeal of their business to potential buyers.
Find out what vendor due diligence is, how it can benefit businesses, and discover a new AI technology that can assist with various aspects of the audit.
What is Vendor Due Diligence?
Vendor due diligence is a comprehensive and objective assessment of a company before it comes up for sale.
There’s no room for flattery when it comes to conducting vendor due diligence. It’s a rigorous, robust independent investigation that aims to expose risks and issues that may drive down valuation and identify a business’s most valuable assets.
Vendor Due Diligence Process
Here is a brief l overview of the vendor due diligence process:
- Before a sale or partnership commences, the vendor contracts an independent third-party consultant to conduct a due diligence audit on their company.
- The consultant conducts a full impartial audit, covering basic company information, financial information, reputational risk, cyber risk, and operational risk.
- The consultant draws up a due diligence report on behalf of the vendor.
- The vendor makes this report available to prospective buyers or partners.
- Upon sale, the vendor hands over the vendor due diligence report to the buyer.
Vendor Due Diligence Checklist
1. Basic company information
The vendor due diligence process usually begins with collecting basic information about the company, and the necessary documentation to ensure it is legitimate and has a legal licence to operate. This information includes:
- Business licence
- Tax number
- Incorporation documents
- A list of stakeholders and beneficiaries
- Organisational structure
- Reliable trade references
2. Financial information
The vendor due diligence process pays particular attention to the financials of the business. Financials are a key element in determining a company’s value. The following documents can be requested as part of the audit:
- Statement of accounts
- Bank statements and balance sheets
- Ageing reports or debtors
- Major assets and liabilities
- Tax documents
- Compensation structure
3. Reputational Risk
A vendor’s reputation can also have a major bearing on its value. In order to assess the reputational risk of a company, the vendor due diligence process increasingly involves collecting information from various public sources and analysing sentiment across online channels such as:
- Mentions of the company on social media
- The company’s social media accounts
- Review sites like TripAdvisor, G2, Google reviews
- ECommerce sites such as Amazon
- Employee review sites like Glassdoor
- Key stakeholder accounts
- News sites and industry magazines
Later, we’ll look closer at how you can use public data sources to demonstrate things like brand value and brand perception.
4. Cyber Risk
The vendor due diligence process also involves assessing the target company’s cyber security, as a failure to adhere to data protection regulations can lead to hefty fines, reputational damage, or even legal action. As such, the consultant conducting the due diligence audit will assess the vendor’s:
- Data protection policies
- Data security measures, such as encryption and firewall protection
- Network topology diagrams
- Password policies across devices and accounts
- Data governance policy to ensure compliance with, for example,
- GDPR regulations
- Physical security protocols in place on site
- Incident response plans
- Threat intelligence reports
5. Operational risk
Finally, the due diligence process should assess the operational risk of a business. This includes looking at things such as:
- Business continuity plan in case of disaster (especially in light of the pandemic)
- Employee policies and procedures
- Organisational structure and staffing levels
- Supplier agreements and contracts
- Health and safety protocols
- Quality assurance measures
- Environmental protection plan
- Insurance coverage
Vendor Due Diligence Benefits
1. Smoother sales process
When due diligence is in the hands of the buyer it can be a nerve-wracking time for the vendor. As the due diligence team meticulously audits every corner of a business, the vendor is left anxiously waiting to find if they discover anything that would drive down the valuation, or that would put the deal in jeopardy.
Vendor due diligence effectively eliminates uncertainty during the sales process putting the seller in a much more advantageous position.
2. Control the narrative
Traditional due diligence puts the vendor on the back foot, unprepared to be able to address risks and weaknesses with the buyers and increasing the chance that a buyer will walk away from the deal.
Vendor due diligence, on the other hand, enables the seller to regain control by either:
a) addressing issues with the buyer before they receive their due diligence report, and reframe the conversation,
b) working to mitigate or repair risks and weaknesses before the business is put up for sale.
3. Be prepared to face buyer challenges
Vendor due diligence also empowers sellers to know their true worth for themselves and recognise if buyers are attempting to drive down valuation. It can also prepare sellers to know what challenges to expect from their buyers.
For example, if the vendor recently invested in part of their business, it won’t yet be reflected in their revenue. If the buyer questions their revenue, they can explain that the benefits of their recent investment are calculated into the valuation.
4. Value creation
Vendor due diligence enables sellers to clearly define their business’s competitive advantage and identify the drivers that will impact future business performance.
Due diligence reports are highly compelling for buyers as they are conducted impartially and are backed up by statistics.
How Social Media Data Can Assist with Due Diligence
Most consultants have a wealth of experience reporting on factors such as financial information and operational risk. But other information is more difficult to capture.
Two such examples are brand value and brand perception. Despite a growing number of social listening tools out there, it’s still difficult to accurately and efficiently grasp how a brand is perceived by its audience, what customers are reacting positively to, and which operational processes pose a risk to the target business.
The Symanto Insights Platform assists with vendor due diligence by quickly and effectively analysing company reputation online from the perspective of customers and employees. Unlike most brand sentiment tools, Symanto’s deep learning text analysis AI can understand words in their context and accurately transform qualitative data into measurable metrics.
The Symanto Insights Platform has the capacity to scan thousands of online conversations, reviews, and comments within minutes and extract valuable insights you can use to determine how a brand is perceived online. No data collection is necessary as it is all readily available across multiple social media channels and review sites.
The Symanto Insights Platform is already connected with around 75 review sites online. If you already have existing qualitative data you’d like to analyse (such as human resources surveys) you can easily import data in the form of a spreadsheet or CVS file for Symanto to scan.
Discover more about how to use the Symanto Insights Platform for due diligence here, or you can get in touch with us directly.