Buyer, vendor, or independent due diligence? Classification based on the entity commissioning the audit

The previous article discussed the division of due diligence (DD) according to the scope of the examination (full scope, red flag, limited scope). However, who initiates and organizes the process is equally important. This determines the distribution of risks, control over information, and the negotiation strategy of the parties.

Below are the basic models used in transaction practice.

Buyer due diligence

Buyer due diligence is a classic model in which the investigation is conducted on behalf of the investor (buyer). The aim is to protect the investor's interests by independently assessing the company's situation and identifying the risks associated with its acquisition.

The report is prepared exclusively for the buyer and is confidential. It is the investor who decides on the scope of the analysis, priorities, and how to use the findings—when negotiating the price, constructing price adjustment mechanisms, or formulating the seller's representations and warranties.

This model provides maximum control over the process, but in the case of multiple potential investors, it can lead to duplication of research and prolong the entire transaction.

Vendor due diligence

Vendor due diligence is an investigation initiated by the seller before the formal sale process begins. Its purpose is to organize the company's legal and financial situation and identify problems before investors enter the process.

The vendor due diligence report is sometimes made available to potential buyers, which speeds up the analysis and increases the predictability of the transaction. The seller can prepare in advance for investors' questions and reduce the risk of unexpected findings negatively affecting the price.

In practice, investors often conduct additional confirmatory due diligence to confirm the key findings of the report prepared at the seller's request.

Independent due diligence

Independent due diligence is a model in which the investigation is commissioned to an independent advisor who is not affiliated with either the buyer or the seller. The advisor acts as impartially as possible, and the report may be intended for several stakeholders.

This model is used, among other things, in transactions between partners, in investment fund exits, in corporate disputes, restructuring, or financing, where the report is also intended for banks or minority investors.

In such cases, it is crucial to define the rules of reliance on the report, the scope of the advisor's responsibility, and the rules of confidentiality. Independent due diligence increases the transparency of the process, but requires precise regulation of the relationship between the parties.

Organizational model and transaction strategy

Similar to the scope of the review (discussed in this article), the choice of the organizational model for due diligence is part of the transaction strategy. Buyer DD strengthens the investor's position, vendor DD can streamline the sale process, and independent DD works well where an objective assessment of the company's situation is needed.

Conscious design of the due diligence process—both in terms of scope and the commissioning entity—allows you to reduce risks, shorten negotiation time, and increase the predictability of the entire operation.

Are you wondering whether buyer, vendor, or independent due diligence would be best for your transaction? Contact us—we will help you design a due diligence model tailored to the structure of the transaction and your negotiating position.