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As business deals are increasing swiftly across the world, it's very important to know who you are dealing with.
We live in a quite risky and dodgy environment. It is very important for an organisation to know with whom they are working.
Therefore, Vendor due diligence is very vital for the buyers/ organisation.
What is Vendor due diligence?
Vendor due diligence analyzes the financial risk of the sellers and it provides summary reports of all the sellers and shares it with the buyers/ organisation.
However, knowing about your vendors and understanding the risk attached to them which is harmful to your organisation is necessary for a successful business.
Due diligence process is to examine current and potential vendor’s risk
Vendor Due Diligence Checklist
1. Basic business information
There are a few documents which are important to collect from the vendors. Collecting basic information about the business of vendors is very vital and critical. As the collected information determines the legitimacy of the business and does it comply with all the local rules and regulations to do the business.
2. Financial review
Assessing the financials of the vendors is important to ensure the financial solvency of the potential vendors. There’s no point in working with such vendors who may not be in the business in the next year.
To conduct a financial review, you can have a deep go through tax documents, loans, balance sheets and major assets.
3. Reputational risk
Vendors who have access to the sensitive information of the organisation must be scrutinised. Evaluate these reputational factors before choosing your vendor-
A. Check organisation name against watch lists
B. Check if any of your employees are against politically exposed persons
C. Internal policies and procedures related to risk
D. Litigation history of the company and its employees.
E. Review the negative feedback
Collecting insurance information from the vendor is similar to customer due diligence. Collect information on insurance liability and insurance of specific services.
5. Cyber Risk
It is important to manage buyer and seller cyber risk, so that risk is identified with the solution before the breach occurs.
An organisation must analyse the compliance status that has been put in the place of addressing the attack.
Why is vendor due diligence important
Today, the business is swiftly expanding all across the borders. VDD is the wholesome solution for a successful agreement between a buyer and a seller. Thus, it helps in making the process very transparent.
It’s important as it helps in identifying the risk involved and speeds up the process.
Benefits/ Advantages of vendor due diligence
- Benefits the seller by reducing the burden as it provides single draft documents to the buyers.
- Helps in speeding up the process of the sale.
- Vendor due diligence is an advantage, whereas it focuses on complex problems.
- Duplication of due diligence will be eliminated.
- As the due diligence is performed by unbiased and trained third parties, the management is less distracted from day-to-day operations.
Vendor due diligence objectives
Vendor due diligence provides you with valuable information about the seller which is very useful for the organisation. It's helpful for having a successful sale.
1. Reduces the inconvenience during the process of the sale.
2. To know about the risk attached and other liabilities of the vendor.
3. Provide financial health certainty to the buyers and partners.
4. It also helps the vendors to make pertinent pricing decisions about their assets.
5. The objective is to improve the quality of the offer received.
6. Have a deep understanding of the issues of your company.
7. Helps in improving the business plan.
8. Showing commitment to the buyer for future sales.
What is the vendor's due diligence process?
First step: Initially, the vendor needs to contact the third party for the due diligence of their account. However, due diligence must be completed before the company offers for sale. An unbiased and trained third party should be appointed to perform an audit for a fair view of the accounts.
Second step: Once the audit is complete, the third party is required to prepare a vendor due diligence report (VDDR). The VDDR is sent to all the relevant parties for their review. After the report is sent, the seller allows the potential buyers to do their own due diligence.
Third step: Negotiations between both parties depend upon the involuted nature of the sale.
Fourth step: If the partnership is done, the third party sends VDDR to the buyer.
Vendor due diligence provides a better overview of the transaction process. And it helps in identifying any financial risk involved and other information related to the vendor. Therefore, it brings enhanced control over negotiations.
Generally, the process of vendor due diligence starts very early, as before the sale process starts. Any risk can be identified and rectified before the buyer looks to it.