Vendor Due Diligence: an opportunity for the vendor to add value – Opinion column – Maria Paz Aguirre

Vendor Due Diligence:…”Anticipation and minimization of risks are its main benefits since it allows the timely resolution of any problem detected during the process. In this way,  surprises, concerns and questions from the buyers are avoided, identifying the risks of the transaction at the outset to adequately address them and prevent a reduction in the company valuation.”

Chile is facing a situation of severe political and economic instability, which began at the end of 2019. This instability has considerably increased the number of people who have diversified their investments, seeking refuge in other currencies and/or countries to reduce their investment risks in Chile.

The preceding has led to an unprecedented increase in mergers and acquisitions activity in our country and leads us to ask ourselves: What can be the best approach for the owners of a company or assets in Chile to prepare the scenario before a future sale?

In this sense, the Vendor Due Diligence appears as a proactive alternative for the seller to face the process of selling a business in an agile and efficient manner and reaching an optimal value for its sale.

Vendor Due Diligence can be defined as the audit and investigation process carried out by an independent third party appointed by the seller to show the actual legal and financial situation of the business or asset to be sold and which is carried out from the perspective of a buyer. It is designed to identify strengths and opportunities besides potential obstacles that could constitute a “deal-break” with buyers.

As in the due diligence for the purchase, the Vendor’s Due Diligence must cover a series of crucial aspects, mainly financial, legal and regulatory. This review has the advantage that any obstacle, irregularity or problem that may affects the the transaction success can be detected in time, avoiding a decrease in the value of the asset or company.

The anticipation and minimization of risks is the key benefit of the Vendor Due Diligence, as it allows for the timely resolution of any problems detected during the process. It avoids surprises, concerns, and questions from the buyers, identifying the risks of the transaction from the outset to adequately address them and prevent a reduction in the value of the asset or company.

The main benefits for a seller of commissioning a Vendor Due Diligence could be summarized as follows:

• It can improve the valuation of the target company or asset: because, during the due diligence process, the seller himself can regularize or clean up situations that mean a deterioration in the value of his business or asset.
• Avoid potential problems or delays in the buyer’s due diligence: considering that potential problems would have already been identified and corrected earlier in the process.
• Reduces the risk of deal-breakers: since it allows mitigating the contingencies detected, which could lead to a rejection of the transaction.
• Strengthens the sales process: with the control of the seller, a due diligence process can help define and enhance the business’s strengths before the sale.
• It saves costs and time: the due diligence process for the buyer will have been organized in advance and eventually allows the transaction to be carried out with documentation already ordered and more quickly.
• Improves the competitive position of the seller: it is a positive indicator for a potential buyer, who also saves time and costs in carrying out their own due diligence.
• It does not require granting exclusivity to potential buyers during the due diligence process: which improves its ability to compete to offer it to different market agents.

Remember that the more offers a seller can receive, the better the profit expectations. The anglicism “One offer, No gain” already says it.

María Paz Aguirre Marfull is a lawyer from Universidad de Concepción and a senior associate in the corporate practice area at ​​Chirgwin.

The column was published in the following specialized media:

Mercurio Legal