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Total Number of Subscribers: 426 |
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Date: 20 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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Check assets before
you put them up for sale Vendor due diligence
can help sellers optimise transaction value, improve the efficiency of the
sale process and prepare for a rigorous scrutiny of their business and
financial information by potential buyers. Do you check things before you sell them? Perhaps, sometimes.
Maybe our day-to-day activities do not require such exercise but more and
more number of corporates should be well off doing just that, before they
sell some assets. That’s what is called ‘vendor due diligence,’ or VDD in short. “Vendor due diligence is a due
diligence review commissioned by a seller or vendor on a business or assets
being offered for sale. The scope of this exercise is determined by the
vendor and usually comprises financial, tax, commercial and operational due
diligence,” says Mr Ashish Singhal, Associate Director (Transaction
Support Group), Ernst & Young India. Sellers desire maximum value with
speed and certainty while buyers, supported by professional advisors, are
savvy value seekers, adds Mr Singhal. In this exclusive email interaction
with Business Line, he
broaches on a number of topics surrounding VDD and tells why it might reduce
the level of buy-side due diligence to a large extent. Over to the expert… Excerpts from the interaction: What is a vendor due diligence? Few years ago, the term “sell-side due
diligence” would have puzzled many corporate development officers and
investment bankers. Today, the phrase has made its way into corporate
boardrooms, and vendor due diligence is fast becoming an integral part of the
sell-side process in any M&A transaction. Sellers today include private equity (PE) houses planning to
divest/monetise their holding in the target companies, or companies requiring
capital infusion, and companies planning to divest non-strategic/non-core
assets. The transactions environment in India has witnessed a change in
recent years much in line with trends seen in the European market, with a
gradual shift in focus and effort from buy-side due diligence to sell-side
work. This has largely been driven by the increase in the number of PE
investors active in India and emergence of a new generation of more
sophisticated buyers and sellers who are used to standardised sell-side
processes. Who starts VDD? Vendor due diligence (VDD) is a due diligence review
commissioned by a seller or vendor on a business or assets being offered for
sale. The scope of this exercise is determined by the vendor and usually
comprises financial, tax, commercial and operational due diligence. In some
cases, depending on the size and nature of the business, vendors may also
commission IT and HR due diligences. How does it differ from buy-side diligence? In a conventional buy-side due diligence, work is done by a due
diligence team on behalf of the buyer or the investor and the focus is on the
key agenda of the buyer. In the case of a VDD, the objective is to conduct a
due diligence review based on buyers’ anticipated
needs from a due diligence. As a result, experience of the transactions landscape and
knowledge of different potential buyers’ concerns and
expectations from a due diligence become key to selecting a VDD service
provider who can present relevant analysis and answers to potential concerns
in a ready format as part of the VDD process. There must be challenges faced by the
seller while doing a transaction. Will VDD help? There are lots of challenges for the seller in today’s market. Sellers desire maximum value with speed and certainty.
Buyers, supported by professional advisors, are savvy value-seekers. Buyers
are always looking for ways to challenge forecasts and past operating
performance in an effort to gain a negotiating advantage and to reduce the
selling price. There would be hardly any transaction that would not benefit
from a vendor due diligence before the business is introduced to the buyers
for due diligence. Doing all the work that buyers are likely to do — and doing it up front — has allowed many sellers to avoid
pre- and post-closing surprises and be prepared to address discrepancies or
problems before the buyer spots them. Buyers are willing to pay more for companies they know and
trust; inaccurate information and evasive or unprepared management have
caused many buyers to walk away. Undergoing a due diligence is a fairly onerous task for most
companies, especially those which haven’t been subjected to
detailed audits and don’t have sophisticated information systems to generate
the information required for a due diligence. Proper planning and a well-scoped and detailed VDD report
normally result in substantial time savings for the seller. This saving in
the transaction timeframe is easily monetised by sellers who would have
earlier access to the capital/purchase price they are seeking to realise from
a transaction. All this was focused on the buyers. What do
I gain, if I as a seller, commission such an exercise? A VDD can help sellers optimise transaction value, improve the
efficiency of the sale process and prepare for a rigorous scrutiny of their
business and financial information by potential investors/buyers. A VDD
establishes a fairly clear value proposition for the seller and it assists
the seller in the disposal process to maximise value by identifying potential
deal-breakers to avoid costly surprises and allows the seller to mitigate
some of these issues before the business is actually offered for sale. Also, VDD highlights any potential upsides and synergies in the
business, allowing the seller to take these into account as part of
negotiations with potential buyers. Second, the maximisation of efficiency. This is enabled by
speeding up the sale process as the potential buyers are better prepared.
Also it prepares the seller management for meetings with the prospective
buyers and for handling their questions. Control is the third benefit. VDD ensures control over the
disposal process and the flow of information to the prospective buyers during
the process. This also helps create a level-playing field for prospective
buyers and enables the seller to maintain the competitive tension, which is
integral to create value for the seller. Minimising disruption is another benefit. This helps in the
day-to-day functioning of the seller. VDD is aimed at answering the potential
questions of the buyer and thereby limiting the need for extensive multiple
due diligences by potential buyers and allowing seller management to focus on
the key deal issues and running the business. What value do investment bankers find in
it? VDD is not only important for the seller, but also it assists
the investment banker to sell the business more clearly, quickly and with
fewer uncertain risks. A thorough VDD would reduce the transaction risk. It
helps the vendor’s strategy and numbers to stand-up to
independent scrutiny, increases the credibility of the teaser and the
information memorandum, can act as a source of pragmatic deal-focused
solutions. Plus, VDD can help management prepare for Q&As and
presentations along with providing ample comfort to bidders through
face-to-face meetings. One key doubt. Will VDD mean end of
buy-side due diligence? The answer to this question may vary from transaction to
transaction and is dependent upon various factors, including the positioning
of the buyer and the seller and the internal protocol of the buyer. However,
VDD would reduce the level of buy-side due diligence to a large extent. VDD reports are prepared with the objective of answering key
questions which a buyer will have while evaluating the business and which a
buyer would expect to get covered in a buy-side due diligence. VDD also has
its own limitation like it doesn’t contain transaction
advice for the buyer and may not address all the items on the agenda of the
buyer. How will the buyer get comfortable with a
VDD done on behalf of the seller? While a VDD is commissioned by a vendor, the work is done by a
service provider with the understanding that the duty of care will be
transferred to the successful buyer and the buyer can place reliance on the
VDD report. This would obviate the need for a potential buyer/investor to
re-perform the procedures carried out as part of a VDD. What are the top and fundamental questions
VDD should address? The key fundamental questions which VDD report should address
are as follows: View on the comfort and robustness of the numbers. What are the underlying and pro forma
earnings of the business? What is the profile of historical and forecast growth and to
what degree are the forecast assumptions supported by the historical growth? What is the view of the current year
outturn and the next year’s forecast? What potential cost savings and other
synergies exist? How does EBITDA convert into cash? What is the definition of working capital?
What is the quality and expectation of the working capital at completion? What will the buyer’s funding requirement be for the first 12 months running the business? Source : Interview Earlier appeared in The
Business Line |
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