Vendor Due Diligence: A Practical Guide
Everything you need to know about Vendor Due Diligence (VDD): what it is, when it's used, advantages for the seller and differences from buy-side FDD.
Vendor Due Diligence is one of the less intuitive concepts in Transaction Services — until you understand the logic behind it. Here's a complete practical guide.
What is Vendor Due Diligence?
Vendor Due Diligence (VDD) is a Financial Due Diligence commissioned and paid for by the seller rather than the buyer. The resulting report is then made available to prospective buyers in the data room, typically alongside the Information Memorandum.
The key distinction: in a standard buy-side FDD, the advisory firm is instructed by and reports to the buyer. In a VDD, the firm is instructed by the seller — but the report is designed to be relied upon by buyers.
When is VDD used?
VDD is most common in:
Competitive sale processes (auctions): when a seller runs a structured process with multiple bidders, providing a VDD to all bidders means each doesn't need to commission a full FDD independently. This reduces data room friction and accelerates the process.
Private equity exits: PE firms are sophisticated sellers who understand the value of controlling the narrative. A well-prepared VDD presents the EBITDA adjustments in the most favourable (but defensible) light before buyers arrive with their own teams.
Complex businesses: in businesses with intricate accounting or multiple segments, a VDD helps buyers understand the financials without extended Q&A processes.
Advantages of VDD for the seller
Speed: a VDD available at the start of the process means buyers can move to binding bids faster.
Narrative control: the seller shapes the EBITDA bridge before buyers do. Legitimate add-backs are presented clearly; sensitive issues can be addressed proactively.
Attracting more bidders: buyers with limited due diligence resources (family offices, corporates) can participate more easily with a VDD in hand.
Reduced management disruption: a single VDD process is less disruptive to management than five separate buy-side FDD processes running in parallel.
Limitations of VDD for buyers
Despite its advantages, buyers remain cautious about relying solely on a VDD:
- The advisory firm was instructed by the seller — any selective presentation or omissions were in the seller's interest.
- The firm's liability to the buyer is more limited than in a direct engagement.
- A VDD may have been prepared based on an older data set — conditions may have changed.
For significant acquisitions, sophisticated buyers typically commission a confirmatory FDD — a targeted buy-side exercise that verifies the key conclusions of the VDD and investigates any open questions.
What TS professionals need to know
Working on a VDD is a materially different experience from buy-side FDD. You're writing the report knowing it will be read by multiple parties with different agendas. The standard for clarity and defensibility is higher.
In interview, if asked about VDD, cover: (1) who commissions it, (2) why it's used in auctions, (3) its limitations for buyers, and (4) how confirmatory FDD complements it.
The programme covers both sell-side and buy-side perspectives across its case studies.