Vendor Diligence Adds Transparency, Reduces Time to Close Deals
February 13, 2015
PitchBook Dealmakers Column
An increasing number of middle-market transactions are taking longer to close and the collapse of transactions mid-deal or executed at lower valuations are characteristics triggering an increase in sell-side diligence. CohnReznick believes that an increased focus on sell-side diligence will help bring greater transparency to the market, potentially shortening the transaction process and increasing the certainty of close. Moreover, buyers, sellers and intermediaries are eager to reduce the possibility of unwelcome surprises during the sale process that could derail the transaction.
CohnReznick has observed a rise in the U.S. of both traditional sell-side due diligence as well as European-style vendor diligence. As more international buyers search for opportunities in the U.S., buyers are starting to demand the same level of protection they receive back home. While buyers get protection in Europe, in the U.S., when a third-party firm helps the seller prepare its due diligence report, potential buyers that rely on that information cannot sue that outside firm if the acquisition turns sour. In other words, the third-party firm has no obligation to the buyer. Overseas, however, the diligence provider has an obligation to the buyer, and if things go wrong, the buyer can recover damages from that third-party provider, although there is often a liability cap on what can be recovered. In a hyper-competitive market, PE firms are eager to close deals faster than ever before—and CohnReznick expects 2015 to be the epitome of that ambition. Vendor diligence is likely to gain considerable momentum in 2015 as it helps buyers and sellers reduce costs and complete the sale process more efficiently.