Vendor due diligence: prepare before buyers dig

In a sale, whoever finds a problem first controls what it costs. If the buyer finds it in the middle of due diligence, the problem becomes leverage: a price cut, a holdback, a wider warranty, or worse, a loss of trust that spreads across the whole deal. If you find it first, it is just a line on a task list. Vendor due diligence means exactly that: auditing your own business through the eyes of a demanding buyer, months before they open the data room. It is one of the few pieces of preparation that almost always pays for itself.

Why auditing yourself changes the balance of power

A serious buyer arrives at due diligence with a simple assumption: anything that is not documented is suspect, and anything suspect justifies a discount. Every blind spot they uncover themselves makes them more cautious about the whole file, including the parts that are perfectly sound. The opposite is true when an SME or startup owner opens with an honest list of their own weaknesses, already quantified and already handled. The buyer stops hunting for what you are hiding and starts pricing what you have built.

• You set the timetable instead of having it imposed on you. Heavy fixes get done calmly, not under the pressure of a signed letter of intent.
• You control the story. A risk you explain costs far less than a risk the buyer digs up.
• You cut the risk of collapse. Most deals that fall apart do so in due diligence, on a surprise, not on the headline price.
• You save time. A data room that is already built and consistent can shorten due diligence by several weeks.

A weakness you reveal is a line to fix. The same weakness found by the buyer is a weapon used against you.

The four angles a buyer always attacks

Due diligence is not a random exam. Buyers and their advisers follow a stable pattern. Anticipating these four angles covers most of what derails a price.

• Quality of earnings. Is EBITDA real and recurring, or inflated by one off items, private costs run through the company, an owner salary that has nothing to do with the market? Every adjustment needs supporting evidence.
• Strength of revenue. Customer concentration, contracts cancellable at any time, one off revenue dressed up as recurring, hidden churn. A buyer pays for recurrence, not for an accident.
• Cash and working capital. A positive profit says nothing about cash. Working capital needs, seasonality and hidden debts (overdue suppliers, VAT, social security) are examined closely.
• Legal and tax risk. Latent disputes, intellectual property held in your own name, short leases, compliance gaps, key people without a noncompete. These are the most expensive surprises because they touch the transfer itself.

A worked example: what an untreated flaw costs

Take an SME valued at 5 times a normalized EBITDA of 1,000,000 euros, or 5,000,000 euros. The buyer's due diligence surfaces two points the owner had not prepared. First, 150,000 euros of EBITDA rests on a single client on a contract cancellable on thirty days’ notice, so the buyer reclassifies that revenue as non recurring. Second, a latent social security liability of 80,000 euros appears. At 5 times, the 150,000 euros stripped out of EBITDA is worth 750,000 euros of value, on top of the 80,000 euros of debt deducted from the price. The price drops from 5,000,000 to about 4,170,000 euros, and that is before the warranty a now wary buyer will demand.

I have watched this play out almost identically with owners who were sure their file held together. The same two points, handled twelve months earlier, would have cost something completely different. Securing the client contract with a multi year commitment makes it defensible as recurring revenue. Provisioning and clearing the social security liability takes it off the table. The owner does not just keep 830,000 euros of the price. They avoid the distrust that does not show up as a number but weighs on every clause of the contract.

Building your seller file, step by step

Useful vendor due diligence is not a binder of documents. It is audit work that produces two deliverables: an ordered data room, and a clear sighted memo of the weak spots with a plan to deal with each. Here is the backbone.

• Rebuild normalized EBITDA over two to three years, listing every adjustment with its justification. An add back you cannot prove will be thrown out.
• Map customer and supplier concentration, the state of key contracts (term, cancellation, assignability) and the genuinely recurring share of revenue.
• Produce a cash and working capital picture, identify real net debt and any off balance sheet or latent liability.
• Review legal and tax: intellectual property in the company name, leases, disputes, compliance, contracts of the people who matter.
• Prepare the data room: articles, accounts, contracts, org chart, metrics, all dated, clearly named and consistent from one document to the next.
• Write a memo of known weaknesses, each with a status (resolved, provisioned, or to be explained) and the answer you will give in the room.

The trap: dressing up the file without fixing the substance

The mistake I see most often is treating vendor due diligence as a formatting exercise: tidy the files, polish the presentation. But a capable buyer does not pay for a neat binder. They pay for a genuinely transferable business and numbers that hold up. Documenting owner dependence does not remove it; it stays a price risk. Vendor due diligence exists to surface the workstreams early enough to fix them, not to gift wrap them. The decisive test is still transferability: does the business run without you, and do the numbers survive an adversarial review?

Before you launch this audit, the most useful thing is to know where the business is exposed today. Our exit readiness assessment runs through the four angles, owner dependence, quality of earnings, strength of revenue and legal risk, and tells you exactly which points a buyer will attack first. It is the starting point for vendor due diligence that defends your price rather than merely confirming a lower one.

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