Vendor Due Diligence: Everything you need to know

Vendor Due Diligence
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Due diligence is a common practice among businesses when they are aiming to steer an acquisition or purchasing assets. However, vendor due diligence is often overlooked. 

VDD (vendor due diligence) is sell-side due diligence that is deployed by the company or individual entity before selling off the business or a particular portion. It can also include the case of a business partnering with another organisation for merger or operations expansion. 

The idea of VDD is to bolster the due diligence process and optimise the time and resources that are dedicated to it. It also helps mitigate the involved risks and liabilities before forging a relationship with another entity. 

Why vendor due diligence matters?

Employing vendor due diligence helps in rendering customised assessment to businesses in multiple areas.

Here’s why it matters:

Streamlines the transaction process

Vendor due diligence provides a big picture of the transaction process enabling a business to simplify it and understand the nuances. Also, it makes relevant information like the nature of business, cash flow, and financial reports easily accessible, which is crucial for streamlining the process. More importantly, VDD flags the potential risks and inaccuracies that can directly impact the assets and the transaction. 

Strengthens transaction negotiations

As the seller-side is aware of the nuances of the transaction and has an overview of the potential risks and features, it puts them in a strong position to steer the negotiation process. It can also be helpful in leveraging certain aspects and give more control over the transaction. 

Cross checks compliance records

The potential partner company or business may have a few skeletons in their closet regarding compliance issues. For instance, US FCPA, UK Bribery Act, Indian Prevention of Money Laundering Act are crucial for businesses to stay on the right side of the law. VDD ensures that the partnership you are about to forge bears no compliance-related consequences and assesses the company for making sure that it has not violated any rules. 

Assesses the authenticity of the partner/buyer

Apart from the compliance measures, VDD enables the seller-side to assess the buyer or partner’s authenticity. It minimises the risk of tying up with a fake company and paves the road for availing long term benefits. For instance, due diligence of all individuals and parties involved mitigates risk in the transaction.

Vendor due diligence is cost-effective. 

Vendor due diligence enables the business to meet ethical standards, confidentiality, brand reputation, and more. On the other hand, the employment of different tools and techniques will segregate such elements and only target specific issues. 

Furthermore, it enhances the cost and time, which can be a burden on a company’s resources. In fact, professional agencies carry out vendor due diligence and provide such services to maintain cost-effectiveness for their clients. 

The checks that Vendor Due Diligence helps you perform

  1. Assessment of the financial profile, which includes earning potentials, asset evaluation, tax, and commercial due diligence
  2. The gaps in the supply chain and the suppliers’ compliance records, including service agreements 
  3. Credit ratings, charges, directors, and shareholding structure
  4. Related companies, documents, and trademarks
  5. Inaccuracies in the media and various databases
  6. Operational efficiency and organisation design and capacity
  7. Security measures regarding the workplace and personnel 

Conclusion

VDD streamlines the transactional process for the seller-side and mitigates the associated risks. It tackles financial shareholding patterns, reputational risks, compliance requirements, media checks, and more. Moreover, it is advisable to choose a VDD partner that utilises AI-driven insights as per the financial, reputational, and operational requirements while maintaining the costs. 

Also Read: Digital Customer Verification: All You Need To Know About Automated KYC Services In 2021

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