M&A Vocabulary – Experts explain: Financial Factbooks vs. Vendor Due Diligence

published on 21 June 2024 | reading time approx. 2 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

In the complex world of mergers and acquisitions (M&A), understanding the instruments and documents applied is crucial for both, buyers, and sellers. Among these are Financial Factbooks and Vendor Due Diligence reports. But what exactly are they, and how do they impact the M&A process?

Financial Factbooks and Vendor Due Diligence reports are key components of M&A transactions. These documents are provided by sellers to potential buyers, offering insights into the financial aspects of the seller's business. Their primary aim for the seller is to identify and reduce risks, enhance value and streamline the M&A process. The buyer benefits from the collection and preparation of information and analyses resulting in reduced buy-side due diligence procedures.

Benefits of FFBs and VDDs for the seller

1. Risk Reduction: By identifying key risks and opportunities in an early stage, sellers can address them before the buyer's scrutiny, reducing risk of sudden transaction failure or purchase price reductions.

2. Increased Value: These documents enhance competitive tension in the auction process, reducing the chances of buyers renegotiating prices post exclusivity.

3. Accelerated Process: FFBs and VDDs facilitate a smoother M&A process by providing credible financial data upfront, minimizing uncertainty and reducing pressure on the seller's management and accounting team in the investor diligence phase.

Differences between Financial Factbook and Vendor Due Diligence

While FFBs and VDDs serve similar purposes, they have distinct characteristics:

Descriptive vs. Independent Assessment: FFBs present financials descriptively, reflecting management's views, whereas VDDs provide independent assessments of the VDD provider, including qualitative perspectives.

2. Scope Flexibility: The scope of work of a FFB can be shaped very flexible but usually focusses on key value drivers and data integrity, while VDDs have to offer a comprehensive review of financial information relevant to potential purchasers.

3. Non-reliance Basis: FFBs are provided on a non-reliance basis, meaning there's no liability from the factbook provider to the purchaser, unlike VDDs.

Benefits of FFBs

Although the VDD has a more sophisticated approach and is the means of choice for transactions with a high purchase price/financing requirements leading to the need for the buyer of being provided with reliance on the sell side document, FFBs offer several benefits in all other cases:

1. Value-added Support: Providers of FFBs can take the position of the seller and therefore extend the seller's advisory team, offering support in negotiations and assisting with financial preparation.

2. Flexibility and Timing: FFBs allow for a more flexible scope of work, focusing on selected key issues reduces time-consuming tasks, leading to a shorter preparation period compared to a VDD. No obligation to present critical/sensitive topics

3. Cost Efficiency: FFBs are usually beneficial from a cost perspective comparedto a VDD.