Why Vendor Due Diligence is Important for SMEs?

Organisations often merge with other entities in the quest of maximizing profits and for sustainability. When it comes to SMEs, partnerships and vendors are extremely crucial for business viability. With more organisations going the outsourcing and collaboration route, alliances are becoming a crucial ‘success factor.

A company should obtain a more detailed overview of the financials, reputation and business model of the future partner before collaboration. It is customary for an organisation to conduct legal, financial, tax, environmental or economic due diligence. Vendor due diligence is an indispensable step before collaborating with a partner company which is gaining prominence over the time.

Vendor due diligence is the due diligence carried out at the behest of, the seller, by independent third parties. Assigning the work of due diligence to a due diligence expert company can save a lot of valuable time and effort of an organisation with an unbiased report. Not only does it save time and money, it also uncovers areas, information on which would be otherwise difficult to obtain, thereby, ensuring better decision making using comprehensive research. Vendor Due Diligence, in all, is an essential risk mitigation practice.

Also read: How to mitigate risks with Vendor Due Diligence?

By carrying out an exhaustive set of checks like address, reference, criminal record enough vital information can be gathered about the opposite entity and the people associated with it, thus leading to a safe and risk mitigated decision.

Vendor due diligence is a ‘Good’ Investment

Vendor Due Diligence is a long-term investment which has intangible benefits- it is a risk mitigation best practice. Below are a few arguments which build a convincing case for background verification:

1)   Vendor due diligence simplifies and accelerates the transaction process, and provides a better overview of the course of the transaction. It reassures vendors about financial and other related information. Moreover, it flags off any potential issues that may arise which could affect productivity and value of the asset about to be sold

2)   Vendor due diligence consults the seller with useful information for conducting negotiations with respect to the transaction in review. With due diligence, a vendor will be in a better position, with much better information of features and possible drawbacks. This brings enhanced control over negotiations for the vendor.

3)   Vendor due diligence ensures that the company to partner with is a legally compliant company. There are certain standards set by regulatory bodies which organisations are bound to adhere. By adopting the process of vendor due diligence, organisations can be assured that they are entering into a business relationship with a company which does not have any record of compliance breach. For instance, compliance to various regulatory bodies like US FCPA, UK Bribery Act, Indian Prevention of money laundering Act is necessary for every organisation to thrive in a global environment.

4) Due diligence of target company provides assurance on the authenticity of the claims made by the organisation. By ignoring the process of due diligence, there lies a possibility of tying up with a fake company.

5)   Over the course of a partnership, it may happen that any of the partners gets involved in unfair and unethical practices which impact the business venture/deal directly. To deal with such unforeseen possibilities, regular due diligence on the parties involved in the venture/deal should be one of the best practices to be incorporated. In all, Vendor Due Diligence has long term benefits and should not be overlooked!