Vendor Due Diligence: Specifics and Process
What is vendor due diligence (VDD) in M&A? How does it differ from buy-side FDD and what should TS analysts know about the VDD process?
Vendor Due Diligence (VDD) is the sell-side equivalent of Financial Due Diligence. Rather than a buyer appointing advisers to scrutinise a target, the seller appoints advisers to conduct the diligence themselves — and then shares the findings with potential buyers. Understanding the VDD model is essential for any TS professional, since it now accounts for a large proportion of the work at Big 4 and boutique firms.
Why Sellers Use VDD
The VDD model became popular for several reasons:
- Process control: The seller controls the scope, timeline and narrative.
- Speed: In competitive auction processes, a VDD report on Day 1 of the process allows bidders to move faster.
- Quality: A well-prepared VDD by a credible adviser reduces the number of buyer questions and management time spent on diligence.
- Price protection: A VDD that proactively addresses potential issues reduces the risk of price chips at later stages.
In a controlled auction, the VDD report is often provided alongside the information memorandum and is one of the first documents potential buyers read.
VDD vs. Buy-Side FDD: Key Differences
| Dimension | VDD | Buy-Side FDD |
|---|---|---|
| Client | Seller / PE vendor | Buyer / PE acquirer |
| Report audience | Potential buyers | Acquirer only |
| Scope control | Seller controls | Buyer specifies |
| Independence | Addressable to buyers | Fully buyer-side |
| Tone | Balanced, transparent | Sceptical, risk-focused |
A critical point: VDD reports are typically made "addressable" to buyers — meaning the buyer can rely on them and, in some cases, bring claims against the VDD adviser if the report was negligent.
The VDD Process
Phase 1: Preparation and Scoping
The seller and their financial adviser (e.g. an investment bank) agree the scope with the appointed VDD firm. Scope typically mirrors what a buyer's FDD team would ask for.
Phase 2: Fieldwork
The VDD team works with management to prepare financial schedules, understand the business, and conduct the analysis. They have direct access to management — an advantage over buy-side teams who work through a data room.
Phase 3: Report Drafting
The VDD report is drafted, reviewed and agreed with the seller. Any sensitive items are discussed with legal counsel before inclusion.
Phase 4: Delivery and Reliance
The report is shared with qualified bidders. Buyers may request "Confirmatory Due Diligence" — a lighter-touch review to confirm the VDD findings rather than re-doing the full analysis.
What VDD Analysts Do Differently
- They work directly with management (no data room barrier)
- They spend more time on "investor-friendly" presentation of the business
- They must balance transparency with protecting the seller's interests
- They often build or review a financial model that will be handed to buyers
Conclusion
VDD is now a standard feature of mid-market and large-cap M&A processes. Understanding how it differs from buy-side FDD — and being comfortable with both contexts — is a key differentiator for TS candidates.
The Transaction Services Interview Programme (€119.99, one-time) covers both buy-side FDD and vendor due diligence, with dedicated case studies for each. Enrol today.