Part of the Private equity and the finance function series.
A vendor due diligence (VDD) report is commissioned by the seller and delivered to bidders, who can rely on it contractually. Vendor assistance is work the adviser produces to support management in presenting the business; bidders receive no reliance and must conduct their own enquiries. Both routes require the same underlying data from the finance team, so the choice should be driven by what the finance function can actually evidence.
What does each engagement produce, and who can rely on it?
A VDD report is addressed to named bidders under a reliance letter. That letter caps liability, but it creates a direct duty of care from the reporting accountant to the buyer. The report typically covers quality of earnings, net debt and working capital, and may extend to tax and commercial sections. Because bidders can rely on it, the adviser applies a higher standard of testing and the documentation bar for every adjustment is correspondingly higher.
Vendor assistance produces a draft information memorandum financial section, a management presentation, or an underlying financial model - materials that management presents as its own. No reliance letter is issued to buyers. Bidders will run their own buy-side due diligence, and the adviser's work product is shielded behind the seller's management. The work is still rigorous internally, but the external exposure is different.
The quality of earnings analysis sits at the heart of either engagement: normalised EBITDA, the adjustments to get there, and the defensibility of those adjustments.
What will the finance team be asked to supply under either route?
The finance team's workload is broadly the same under VDD and vendor assistance. An adviser starting either engagement will request, at minimum:
- Monthly management accounts, reconciled to statutory accounts - for at least three years. The reconciliation between management and audited numbers is the first thing tested. Unexplained gaps immediately raise questions about the reliability of the management accounts series.
- The EBITDA bridge and its adjustments - each adjustment documented with the underlying invoice, board resolution, or other primary evidence. Recurring versus one-off classification must be supportable.
- Net debt and working capital schedules - at multiple balance sheet dates. Working capital is tested against a normalised average; the dates chosen matter, and cherry-picked dates are usually identified quickly.
- Entity-level data that consolidates cleanly - trial balances per entity, intercompany schedules, and confirmation that eliminations agree. Groups running disparate systems will find this the most time-consuming step. The consolidation of entities with different charts of accounts article covers the mechanics in detail.
Management will also be asked for customer and revenue detail, contract terms where revenue recognition is an issue, and headcount analysis. The finance team is the primary source for all of it.
Where do finance functions typically get exposed once an adviser starts testing?
Three failure points appear repeatedly once an adviser works through the data.
Management accounts that do not tie to statutory numbers. The most common issue is a cumulative difference that has never been formally explained - accruals reversed differently in the management pack, costs capitalised in the statutory accounts but expensed in the management pack, or restatements applied to one set of numbers and not the other. An adviser will map every difference and ask for documentation for each line. If the finance team cannot produce it, the EBITDA series becomes unreliable and every adjustment built on it is questioned.
Intercompany balances that do not eliminate. In a group with several trading entities, intercompany loans, management charges, and cost recharges must net to zero on consolidation. Discrepancies indicate either incomplete records or transactions that were structured in a way that leaves a residual - both of which require explanation. The sponsor reporting pack article covers the intercompany discipline that PE-backed groups are expected to maintain throughout the hold period.
Adjustments that nobody can document. A normalised EBITDA figure is only as credible as the paper trail behind each add-back. Adjustments for exceptional items, owner costs, or one-off projects require board papers, third-party invoices, or written management explanations. Verbal explanations given during fieldwork are not sufficient for a VDD reliance letter and create risk in vendor assistance too.
How should the CFO judge readiness before the sponsor commits to VDD?
The sponsor's choice between VDD and vendor assistance is partly commercial - VDD can accelerate a process by giving bidders a shared information base - but it should also be a function of what the finance team can defend. A CFO who commits to VDD without first stress-testing the data is accepting a higher risk that fieldwork uncovers issues in a process that is already public to bidders.
A practical readiness check covers four questions. First, can the team produce a clean three-year EBITDA bridge, with primary evidence for each adjustment, within a short timetable? Second, does the management accounts series reconcile to the statutory accounts for every year in scope, with differences explained and documented? Third, do intercompany balances eliminate without residuals? Fourth, is the group consolidation process robust enough that entity-level trial balances can be produced quickly - including for smaller or recently acquired subsidiaries?
The exit readiness guide sets out the 12-24 month preparation programme that addresses each of these questions before a process starts. A CFO who has worked through that programme will know in advance where the exposures are and can advise the sponsor on route accordingly.
If the answer to any of the four questions above is uncertain, vendor assistance - with buy-side diligence expected - is the lower-risk path. If the finance function can pass all four, VDD is a credible option and removes the risk of inconsistent messages reaching different bidders.
Common questions
What is the difference between vendor due diligence and vendor assistance?
Vendor due diligence is a report addressed to bidders who can rely on it under a contractual reliance letter. Vendor assistance produces materials that management presents as its own, with no reliance extended to buyers. Bidders receiving only vendor assistance must conduct their own independent due diligence.
Can bidders rely on a vendor assistance report?
No. Vendor assistance carries no reliance for buyers; the duty of care runs to the seller's management only. This is how UK adviser firms distinguish the two engagements, and it is the reason bidders in a vendor-assistance process will commission their own buy-side quality of earnings work.
What financial data does the finance team need to supply for a VDD?
The core requirement under either route is a monthly management accounts series reconciled to statutory accounts, an EBITDA bridge with documented adjustments, net debt and working capital schedules at multiple dates, and entity-level trial balances that consolidate cleanly with intercompany balances eliminated. A VDD applies a higher testing standard to each of these because the adviser owes a duty to bidders.
What is the most common reason a VDD process uncovers problems?
The most common issue is a management accounts series that does not reconcile to the statutory accounts, leaving the EBITDA history in doubt. The second is intercompany balances that do not eliminate on consolidation. Both problems are discoverable before a process starts if the finance team runs its own reconciliation ahead of appointing an adviser.
How should a CFO decide between VDD and vendor assistance?
The decision should turn on whether the finance function can produce a clean, documented EBITDA bridge, a management-to-statutory reconciliation, eliminated intercompany balances, and entity-level data quickly and under scrutiny. If any of those four are uncertain, vendor assistance - with buy-side diligence expected from bidders - carries less risk than committing to a VDD report that bidders will rely on.