Why vendor commercial due diligence is gaining popularity

08 February 2021 Consulting.us 4 min. read

The use of vendor commercial due diligence (VCDD) has grown significantly over the past decade, according to analysis by CIL Management Consultants.

When companies want to sell or buy an asset, they typically conduct due diligence – a comprehensive audit or review of all available information about the asset. Due diligence can apply to a range of business topics – from commercial and business models (commercial due diligence) to financials (financial due diligence), to similar exercises for information technology, operations, or even culture.

CIL Management Consultants, a strategic consultancy with expertise and experience in due diligence, surveyed investment banks in Europe and the United States with a focus on vendor commercial due diligence (or sell-side due diligence) – finding that the popularity of VCDD has risen considerably in recent years.
Why vendor commercial due diligence is gaining popularity

What's driving this?

Adoption has largely increased over the last ten years, with vendors and investment banks using these reports as an independent assessment of a business. A VCDD offers targets a strong, fact-based commercial narrative, while bidders benefit from increased transparency. CIL sums up the benefits of VCDD into three pillars – process, predictability, and price.

One, a VCDD can shorten the entire merger & acquisition (M&A) process, and boost its efficiency. Calls and queries from multiple bidders can overwhelm company leadership, distracting them from other important tasks. A VCDD can preempt bidder questions, gather all the necessary information, and distribute it in one go. It can also gather customer feedback for bidders, protecting the customers from high volumes of frequent contact.

“With bidders better informed, earlier in the process, they need less time between bid rounds to conduct their own research and any questions which do crop up will be more relevant,” explained CIL partner Axel Leichum.

Next up is predictability. VCDD gives bidders a complete picture of what they’re buying – including all the problems and challenges. Examples include commercial issues, disruptive market factors, or customer problems. A VCDD helps leaders hone in on these issues and present them at the start of the process.

“In the end, if due diligence is not conducted by the seller, there is the risk that commercial issues will be uncovered further down the line and used to influence negotiations. Approaching the sale with a buyer’s mindset ensures that the vendor is in control and the process is conducted with the greatest levels of preparedness,” explained CIL principal Rebecca Pigula.

Why vendor commercial due diligence is gaining popularityLast on the list is price. Valuations are based on a total understanding of a business, complete with its full value proposition as well as its shortfalls. The goal is to have multiple bidders understand this big picture, setting off a bidding battle that will drive up the selling price. A VCDD is best suited to deliver such a full understanding.

“If there is no VCDD, bidders rely on their own research which may focus on downside risk, meaning that they may not fully grasp the value proposition or underestimate the target's growth potential,” explained Leichum.

Different approaches

Now playing a core role in the global M&A landscape, VCDD has gained ground faster in Europe than in the US. According to CIL, this is likely a product of differing approaches to the VCDD process.

In Europe, VCDD reports are more holistic, and close to the model described above – with full disclosure of a company’s internal health, historic growth factors, market positioning, and external factors. VCDD’s in the US tends to be more superficial in nature, offering a brief overview of market positioning and external drivers – with little internal company information.

That being said, the CIL report notes a gradual shift towards the European model even in the US, owing mainly to two factors. For one, VCDD’s are usually conducted by third parties – perceived to be more objective than company researchers or investment banks who might have skin in the game. Secondly, third parties usually have legacy expertise and information to work with, which can add an extra dimension to VCDD reports.