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Insights M&A Vocabulary – Experts explain: “Financial Fact Book, Vendor Financial Due Diligence Report”

M&A Vocabulary – Experts explain: “Financial Fact Book, Vendor Financial Due Diligence Report”

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​​​​published on 20 October 2022 | 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.

Nowadays, hardly any company is acquired without a due diligence; financial due diligence is part of the standard for a purchase preparation. The scope and focus of a financial due diligence also make purchase candidates dependent on what kind, to what extent and in what quality the information is made available to them.

Financial Fact Books (“FFBs”) and Vendor Financial Due Diligence Reports (“VDDRs”) are documents in M&A transactions that sellers provide the buy candidates on the occasion of the sale of their company or their shares in the company with the purpose of presenting information about the financial aspects of the Target. In structured sales processes of larger targets, purchase candidates expect these documents; insufficient information, especially in more complex purchase situations such as carve-outs, is often acknowledged by prospective buyers with purchase price reductions or even  abandonment of their participation in the process. Both variants of information significantly increase the efficiency of the M&A process for the sellers, for the following reasons:

  • Acceleration of the M&A process (starting with contacting acquisition candidates) through professional, transaction-oriented and consistent data preparation instead of the transmission of raw basic data and correspondingly more extensive buy-side DDs
  • generally, sellers receive an appropriately stocked data room as a by-product 
  • additionally, with the VDDR:
  • Reduction of sales risks as a result of (early) problem awareness on the part of the seller with regard to identified issues or as a result of possible problem healing
  • Avoidance/reduction of later “surprises” and possibly necessary explanations of facts under time pressure in phases of the M&A process that are already labour-intensive for sellers; seller knowledge at least on a par with that of the purchase candidates  
  • Avoiding of time-consuming and nerve-racking unnecessary communication loops and possible losses of confidence among purchase candidates

FFBs differ from VDDRs in terms of content in that they contain only descriptive presentations and comments on financial information and facts, but do not contain the preparer's own business assessments and other evaluations or interpretations. FFBs are usually prepared by experienced M&A advisors or certified public accountants, VDDRs almost exclusively by certified public accountants. While the scope of the subject blocks dealt with in both documents - depending on the extent of work commissioned with the sellers  - is similar in individual cases, a FFB is often shorter due to a lower level of detail and due to the lack of assessments by the preparer. 

In accordance with transaction practices, neither the FFB nor the VDDR preparers are liable for any misstatements in their documents towards the purchasers or their lenders, if any, on the basis of corresponding non-reliance agreements. However, in the final stage of the M&A process, the preparer of a VDDR regularly grants reliance to the actual buying party and, if applicable, to its financiers. 

In current transaction practice, FFBs are still more common than VDDRs in transactions with medium-sized targets, but with a declining tendency. In the case of small targets, this is sometimes dispensed with in favour of a more detailed information memorandum in the financial section.

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