In the world of mergers and acquisitions (M&A), due diligence is commonly associated exclusively with the buyer, who, before completing a transaction, investigates the target company to identify risks, understand its actual circumstances, and validate the assumptions underlying the deal. What many business owners still do not realize is that sellers can (and often should) conduct their own due diligence before putting their company up for sale. This practice, known as vendor due diligence, has been gaining ground in the Brazilian market and can make the difference between a smooth negotiation and a process stalled by unpleasant surprises.
Traditional due diligence is conducted by the buyer’s advisors during negotiations. Its purpose is to identify risks, assess potential liabilities, and verify the actual condition of the target company before the execution of definitive agreements. In practice, it involves a thorough review of financial figures, contracts, and operations, enabling the buyer to make decisions based on concrete data rather than optimistic projections.
Vendor due diligence, on the other hand, is a preliminary investigation conducted by the seller. Through this process, the seller anticipates the work that would otherwise be carried out by the buyer, seeking to “get the house in order” ahead of a potential sale. This means identifying internal risks and remedying potential compliance issues that could affect the purchase price or even jeopardize the transaction.
The benefits are tangible, and the most important is knowledge. By conducting its own due diligence, a company gains visibility into risks that might otherwise remain hidden. After all, in any M&A transaction, the greatest risk is often the one that no one has identified. Armed with this assessment, the seller can make informed decisions about which issues to resolve, which to mitigate, and which to simply prepare to address if raised by the buyer during its own due diligence.
Vendor due diligence also strengthens the seller’s position at the negotiating table. Those who understand the weaknesses of their own business are less likely to be caught off guard. When challenged by the buyer, the seller can provide well-founded responses from its own perspective rather than improvising answers to unexpected questions. This reduces the risk of the counterparty overstating sensitive issues and enhances the seller’s credibility throughout the process.
Another practical benefit that is often underestimated is the direct financial impact. When the seller identifies and resolves significant contingencies in advance, these matters no longer need to become points of contention in representations and warranties provisions, purchase price retention mechanisms (holdbacks), or post-closing adjustments. An undisclosed labor liability discovered by the buyer during due diligence, for example, is likely to result in a substantial holdback or a direct reduction in the purchase price. If the seller has already identified and addressed that liability, the risk is effectively removed from the equation. Similarly, a regulatory license approaching expiration that has not yet been renewed may become a condition precedent to closing, delaying or even preventing the transaction. Ultimately, vendor due diligence allows sellers to anticipate these obstacles and avoid leaving money on the table.
This internal preparation process, which includes establishing a comprehensive data room and consolidating corporate documents, contracts, and financial information, also makes the transaction more efficient. When the buyer begins its own due diligence and finds well-organized, easily accessible information, negotiations tend to progress more quickly, reducing transaction costs for both parties.
The investment in vendor due diligence is often more than offset by gains in efficiency and, above all, the opportunity to maximize the final transaction value. Irregularities identified and remedied before negotiations begin can no longer be used as arguments for reducing the purchase price and instead become evidence of sound corporate governance.
In Brazil, vendor due diligence has been gradually becoming an established practice, with each party seeking to protect its interests when determining the ideal timing for the review. Sellers who take a proactive approach by organizing corporate documentation, ensuring compliance with legal and tax obligations, and preparing a structured data room position themselves more competitively in the market. In addition to attracting qualified investors and accelerating negotiations, they protect their assets and the transaction price, preventing unidentified or poorly managed contingencies from eroding the company’s value in the final stages of the deal.
Considering all these benefits, vendor due diligence should be regarded as a strategic investment. More than an internal assessment, it adds value to the transaction, reduces risks, and gives the seller greater control over the M&A process. Business owners considering selling their companies may discover that the first step is not finding the right buyer, but ensuring that their business is ready to be found.
If you would like to learn more about preparing your company for a sale or capital raising, the Transactions Practice Group at Marins Bertoldi is available to assist you.
