Vendor Due Diligence: Benefits, Scope and Key Phases for Sellers

19.4.2026 | ARROWS law firm

Vendor Due Diligence (VDD) is a process through which a seller has their own business reviewed before a potential buyer examines it. Instead of the buyer gradually uncovering surprising information during the transaction and lowering their offer, the seller identifies and resolves any problematic areas on their own. This results in a stronger negotiating position, a faster sale, and price protection. In practice, however, many Czech business owners overlook VDD and only provide documents and financial records when the buyer specifically requests them. This mistake typically costs them a significant portion of the purchase price.

The photograph shows an attorney during a consultation regarding vendor due diligence.

Article contents

What Vendor Due Diligence is and how it differs from the buyer’s approach
Practical benefits of Vendor Due Diligence for the seller
Which areas Vendor Due Diligence reviews
How Vendor Due Diligence works – typical phases
Vendor Due Diligence costs and their return on investment
Vendor Due Diligence and tax structuring of the transaction

What Vendor Due Diligence is and how it differs from the buyer’s approach

Vendor Due Diligence is a formal legal and financial review of the company itself, commissioned and funded by the seller, not the buyer. Unlike traditional due diligence, which is carried out by the buyer and their advisors after signing a Letter of Intent (LOI), VDD takes place even earlier—before all documentation is made available to a potential buyer.

While buyer due diligence (Buyer DD) is focused on protecting the buyer and identifying risks that could reduce their interest, VDD has a completely different objective. The seller commissions it in order to identify and resolve issues in advance. This is not “money down the drain”, but an investment with a high return.

A standard process without VDD looks like this: the buyer states an indicative price in a letter of intent (LOI), then reviews the company’s documentation, their advisers examine it for four to eight weeks, and they discover, for example, an invalid licence, an old legal dispute, accounting errors, or a tax risk.

The buyer then reduces their offer by, say, five to fifteen percent and argues that they “have to bear these risks”. The seller typically cannot push back strongly, because the transaction could fall through and finding a new buyer would take another six months. This tactic is called price chipping and is common in the M&A environment.

VDD fundamentally changes this situation. At the outset, the seller carries out their own review, finds the same issues earlier, and has several options for how to handle them. They can remedy them (settle a legal dispute, complete missing documentation, obtain a missing licence), describe them transparently in the report and explain why they are not an issue (for example, that concerns about a tax risk are unfounded), or factor them into the purchase price already in the initial offer so you know what figure to work with. This gives you negotiating leverage and a level of professionalism that the buyer will respect. In practice, transaction documentation set-up and the negotiation of warranties are also often addressed at this stage, where it can be useful to have support through company sales and transaction advisory services.

Practical benefits of Vendor Due Diligence for the seller

VDD brings the owner or management of the company several specific benefits that can be measured in the transaction outcome.

Control over the narrative and negotiating leverage

When the seller has VDD prepared, they have time (typically several months) to familiarise themselves with each risk. For example, if they find that certain copyrights are not clearly owned by the company, they have time to agree with the former developer on a supplementary acknowledgement of ownership. Or if they find that a supply agreement contains a change-of-control clause that could be an issue, they have time to renegotiate it with the supplier.

The opposite is painful: during their review, the buyer suddenly discovers the same issue, and because they are already in a position where the transaction is “on the table” and the seller wants it, the buyer says: “We will price this into the purchase price.” The seller is then in a position where they either concede on price or risk the deal falling through.

With VDD, you already know at the initial offer stage what you will be defending, and you have the answers and documentation prepared. Psychologically, this shifts the conversation from “we discovered a problem” to “we know the problem and we have it addressed”.

Speeding up the transaction and shortening exclusivity

In their own review, the buyer usually needs four to eight weeks to examine documentation, interview management, and perform analytical work. However, if they already have a completed professional VDD report from the seller prepared by a recognised auditor, lawyer, and tax adviser, they can significantly accelerate their own review. The buyer then typically only verifies that the VDD report is consistent with reality and does not need to do everything from scratch.

This has a direct impact on the period during which the company is unavailable to other potential buyers—the so-called exclusivity period. It is advisable to think through the tax aspects of transaction preparation and the review in advance, because differences in approach are also strongly reflected in the price, as discussed in the article financial and tax due diligence in acquisitions. The LOI typically contains a clause that after signing it you will negotiate only with this buyer and not with competitors for 60 to 90 days. If VDD is available to the buyer, this period is focused on substantive decision-making rather than administrative review. The result is that the transaction closes sooner and the seller does not have to “tie themselves up” with a single buyer for a long time.

A stronger position when negotiating the price

The price of a company is usually determined as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortisation) or discounted cash flows. However, the buyer typically requires so-called normalised EBITDA, where adjustments are made for extraordinary expenses, losses from one-off projects, or, conversely, profit from an invoice that may not recur.

Without VDD, these discussions are often accompanied by uncertainty. If disagreements over EBITDA adjustments or the interpretation of underlying documents escalate, it is advisable to have a strategy prepared for commercial and litigation disputes. The buyer does not know what to normalise, and the seller does not either. Both sides then partly “guess” what figures reflect the company’s actual performance and what are anomalies.

With VDD, the seller already has clarity from an expert as to what the company’s true profits are and what one-off distortions exist. When the buyer then comes with their own analysis, the seller can say: “We verified that with our auditor. Here is where it differs. This is not manipulation, but…” This strengthens credibility and reduces room for unjustified discounts. Similarly, when structuring the sale it is worth taking into account the tax differences between transaction options, as summarised in the update acquisition and sale of a company 2026: key tax differences between an asset sale and a transfer of a business interest.

When the seller decides to proceed without VDD: typical issues and risks

The opposite of the recommendations above are the real issues faced by sellers who do not have VDD prepared.

Discovering hidden issues only at the last minute

A common scenario: The seller thought everything was in order. During due diligence, the buyer discovers that: the company has an unresolved legal dispute with a former employee over termination. No one talked about it because everyone assumed the lawyer was handling it properly. Documentation proving registration of a trademark the company has used for years is missing. Without it, the trademark may not belong to the company, and the buyer fears that an incoming owner could legitimately claim it. The accounting shows unusual transactions with the owner’s family members: purchases of goods at higher prices, sales of services at lower prices. The buyer worries this signals poor financial management or hidden risks.

Once the buyer finds this out (typically 4 to 6 weeks after the LOI), they have two options. Either they say: “I have to bear this risk. I’m reducing the price by X million.” Or they say: “I’m holding off on signing until you resolve this.” In both cases, the seller loses.

Price chipping – gradual price reductions

The term price chipping refers to a buyer’s tactic where, after months of due diligence, they gradually “discover problems” and with each one attempt to reduce the purchase price. The word “problems” is in quotation marks because sometimes these are not real problems, but the buyer presents them that way to create room for negotiation.

Example: The buyer says that the company’s cash flow last year was lower than expected, so a decrease in EBITDA is expected in the “post-closing” adjustment. Therefore, they should pay 8 percent less. When the seller argues that this is not true, the buyer says: “We can sort that out later in court. But given the risk, this is the price we’re offering.” The seller no longer has the capacity to litigate with a company they have already sold, and in order to get the transaction completed, they try to reach an agreement.

With VDD, this tactic is significantly harder to apply. Each “new” issue raised by the buyer can be challenged on the basis that the VDD report has already analyzed these circumstances and they were part of the original offer.

Long-term liability for hidden defects

If the seller does not carry out VDD and is not aware of a particular issue at all, the buyer may discover it after closing (i.e., after the final transfer). Even in this case, the buyer may seek indemnification—i.e., compensation from the seller. Typically, an so-called escrow holdback is set up for this purpose, where part of the purchase price remains in escrow with a third party (a lawyer or a bank) for 12 to 24 months.

Example: The seller thought all tax returns were in order. But 6 months after closing, someone reported to the tax authority that in 2023 the company did not qualify “X” as a gift and should have paid tax of 1.5 million. The buyer will take 1.5 million from the escrow holdback as compensation for this risk the seller overlooked.

This is exactly why VDD is done: so that the seller knows what risks exist before they dispose of them, and can either address them in the share purchase agreement (SPA) through appropriate representations and warranties, or communicate them transparently.

Which areas Vendor Due Diligence reviews

VDD usually covers four or five core areas. The scope is tailored to the type of company and the industry.

Legal due diligence

Legal due diligence (Legal DD) focuses on the company’s legal structure, its history, and its contracts. The review covers:

Corporate documentation: All general meetings, directors’ resolutions, changes in the legal structure. If there is a discrepancy between what is recorded in the Commercial Register and what is in the internal documents, it must be rectified. For example, if a change of shareholders was made in January but registered only in March, there is a delay that the buyer will view with suspicion.
Contractual obligations: All key contracts with customers, suppliers, landlords, banks, and others. The lawyer assesses whether the contracts are valid and enforceable and whether they contain clauses that could be problematic. Typically, so-called change-of-control clauses are sought—contract provisions that are triggered when there is a change of owner. For instance, when all shares in an s.r.o. are sold, it may happen that a supplier automatically terminates the contract if such protection is agreed in the contract.
Employment law: Employee contracts, non-compete clauses, vacation accruals, insurance contributions. In a company sale, the transfer of employees is governed by the Czech Labour Code, and these are obligations the seller cannot ignore. VDD checks whether all contracts are in order and whether the seller has fulfilled all information obligations.
Intellectual property: Trademarks, patents, copyrights, licences. If the business is built on proprietary software, it must be clear who owns that software. If the software was created by an external developer, there should be an agreement transferring the rights to the company. If this agreement is missing, it can be a problem.

Financial and tax due diligence

Financial due diligence (Financial DD) is the most extensive and the most important. It reviews financial statements for the last 3 to 5 years, the structure of assets and liabilities, cash flow, and hidden risks.

Verification of income and expenses: It is reviewed whether revenues are real and recurring, or whether they are one-off purchases. For example, if the last two months of the year are anomalously high, it is a signal that the buyer will normalize these months and future profits will not be as high.
Identification of debts and liabilities: All loans, mortgages, leasing, and other debts. Are they all recorded in the accounts? Are there any hidden debts? The buyer will want to ensure they know all obligations they are taking on with the company.
Adjustments for anomalies: For example, if a family member works in the company for minimum wage but in reality performs a managerial role, normalized EBITDA will be higher than what the accounts show.
Analysis of receivables and payables: Are receivables real, or are they overdue and uncollectible? Write-offs should be realistic and consistent with tax rules.
Transfer pricing: If this is a holding structure or transactions between related parties, the prices of these transactions must be “arm’s length” and correspond to customary market prices. The tax authority often focuses on these topics and may impose penalties.

Operational and commercial due diligence

Operational due diligence examines how the company actually operates. Are processes documented? How dependent is the business on one key employee? What are the relationships with key customers and suppliers?

Customer concentration: Does the company generate 80 percent of its revenue from three customers? If so, this is a risk, because if one of them leaves, the company may fall into crisis.
Supplier risks: Is the company dependent on a single supplier for a critical component? If so, this is also a risk.
Licensing and regulatory requirements:Does the company have all necessary licences and permits? Are these licences that must be renewed annually? Are there any compliance risks?

How Vendor Due Diligence works – typical phases

VDD is usually carried out in the following steps:

1. Preparation and selection of advisors
The seller hires a team of advisors: a lawyer, an auditor, and a tax advisor. Together, they agree on what scope of VDD makes sense for the given company and industry. For an IT company, the main focus will be software and licences. For a real estate company, the main focus will be properties and lease agreements. The team then prepares a list of documents and information it will need.

2. Collection of documentation and information
The seller and the company’s management provide the advisors with all supporting materials: financial statements, contracts, legal documents, internal processes, a list of employees, etc. This phase usually takes 2 to 4 weeks.

3. Analysis and interviews
The advisors review the documents, ask questions, and conduct interviews with management. They look for inconsistencies, risks, and anomalies. This phase takes 4 to 8 weeks depending on the size of the company.

4. Preparation of the report
The advisors prepare a detailed report (typically 30 to 60 pages) summarising the findings. The report usually includes: a summary of key findings, a breakdown of findings into “Deal Breaker” (issues that could block the transaction), “High Risk” and “Low Risk”, and recommendations on how to address each risk.

5. Risk remediation and preparation for sale
Based on the report, the seller takes ownership of a list of items that need to be resolved. Some can be fixed (e.g., completing documentation, resolving a legal dispute). Others cannot be fixed, but need to be prepared as an explanation for the buyer.

After this phase, the seller takes the report and starts looking for a buyer. When and how the report is used depends on the sale strategy. Some sellers provide it to the buyer immediately as part of the information memorandum. Others first resolve all issues and only then release the report.

Vendor Due Diligence costs and their return on investment

VDD costs vary depending on the size and complexity of the company, the scope of the review, and the expertise of the advisors involved. Typically, they range from hundreds of thousands to several million Czech crowns.

Specific expenses may include: Legal services (from hundreds of thousands of Czech crowns for smaller transactions to several million for larger and more complex ones), financial auditors (roughly from CZK 100,000 to CZK 1,000,000), tax advisors (from CZK 50,000 to CZK 500,000), and document preparation and other specialists (e.g., IT, environmental, typically from CZK 100,000 to several hundred thousand Czech crowns).

Overall, investment in VDD usually falls within the range of 0.5% to 3% of the estimated transaction price for mid-sized and larger businesses, while for smaller transactions the relative share may be higher. It sounds expensive. But the return is several times over. If VDD protects 5% to 10% of the price (which commonly happens when issues are identified and resolved that the buyer would otherwise discover and use to reduce the price), the return is immediate and positive.

In addition, there are many side benefits: the transaction closes faster (shorter exclusivity), the seller has greater psychological control during negotiations, and the seller avoids a situation where the buyer sues them 6 months after closing due to a hidden issue. The attorneys at ARROWS, a Prague-based law firm, can assess whether VDD is worthwhile for your specific company and what scope makes sense.

Typical issues that Vendor Due Diligence usually uncovers

Based on the experience of advisory firms and attorneys, these are the most common findings identified within VDD:

1. Missing or incomplete documentation
General meetings are not properly recorded. There are decisions that are not reflected in the Commercial Register. Signatures are not notarised. This leads to uncertainty about the validity of historical decisions. The buyer will want assurance that all decisions were valid.

2. Change-of-control clauses in key contracts
A supply agreement with the largest partner contains a provision that, in the event of a change of owner, the price increases by 20%, or the contract may be terminated. This is a shock for the new owner and reduces the company’s attractiveness.

3. Hidden legal disputes
An employment dispute with a former employee that has been ongoing for some time and no one speaks clearly about it. The buyer will uncover it during the review and will want it reflected in the price.

4. Unclear ownership of intellectual property
A trademark used in the business is not clearly owned by the company. Software licences are not entirely clear. The buyer will detect these risks and reduce the valuation.

5. Unusual transactions and distorted financials
The sale of assets to a family member at unusual prices. Purchases of goods at higher prices from a connected party. This signals to the buyer that the accounting may not be objective.

6. Tax risks
Insufficient transfer pricing documentation. Errors in the proper signing of tax returns/filings. Uncertainties regarding VAT on the sale of certain assets. These risks are particularly apparent in the Czech Republic, as the tax authority likes to focus on them.

7. Employment law and HR shortcomings
Employment contracts are not formally in order. Non-compete clauses are not properly agreed. Training programmes for key personnel are not documented.

The attorneys at ARROWS, a Prague-based law firm, are experienced in identifying these types of issues and can advise you on how to resolve them.

Risks and sanctions	How ARROWS helps (office@arws.cz)
Missing or incomplete legal documentation – general meetings are not properly recorded, signatures are not notarised, historical decisions are not valid	ARROWS attorneys conduct a legal audit of all documents, verify the company’s history, and ensure that all decisions and filings comply with Czech law.
Risk of change-of-control clauses in key contracts – supply or financing agreements may be terminated or their terms changed upon a change of owner	We ensure a review of all key contracts, communication with contractual partners, and appropriate pre-negotiation of changes to terms before the sale.
Hidden legal disputes and employment issues – unresolved disputes with former employees, unclear employee status	We will work with you to set a strategy for resolving all legal disputes and ensure proper setup of employment-law documentation under Czech legislation.
Tax and financial risks – transfer pricing is not documented, accounting errors, uncertainties with VAT discounts	We work with tax advisors and auditors to identify all tax risks and prepare documentation to cover the risks.
Unclear ownership of IP and licences – trademarks are not clearly owned by the company, software licences are not properly documented	We carry out a detailed IP Scan, verify all intellectual property rights, and ensure that everything is properly transferred to the buyer.

Vendor Due Diligence and tax structuring of the transaction

The tax aspect of the sale is no less important. In the Czech Republic, there are two basic ways of selling: a share deal (sale of ownership interests or shares) and an asset deal (sale of assets).

In a share deal, you sell your ownership interest or shares in an s.r.o./a.s. to the buyer. The buyer thus acquires the legal entity with all its rights, obligations, and history. If you meet the time test (typically, an individual holding an ownership interest for at least 5 years in an s.r.o. or a.s.), this sale is exempt from income tax (rate 0%) in accordance with the Income Taxes Act as applicable for 2026. This is significantly more advantageous than an asset deal.

In an asset deal, the company sells its assets and you then pay out the money as a dividend. However, this is subject (under the Income Taxes Act as applicable for 2026) to: corporate income tax (21% of the profit from the sale of assets) and withholding tax on profit distributions/dividends (15% of the net profit after corporate tax, paid to an individual). The effective taxation here is 32.85%, which is significantly more than a share deal.

This is exactly what you need to prepare for already during VDD. If there are anomalies in your accounting that will concern the buyer, you should have them ready with an explanation. Otherwise, the buyer may opt for an asset deal, reducing your net proceeds. As part of VDD, the attorneys from ARROWS, a Prague-based law firm, will help you assess which sale structure will be the most tax-efficient for you.

Final summary

Vendor Due Diligence is the most effective way for a seller to maintain control over the process of selling a company. Instead of waiting for the buyer to discover issues over months and then use them as leverage to reduce the price, the seller has the company reviewed professionally and in a timely manner.

The practical benefits are clear: control over the narrative, price protection, a faster transaction, and a signal of professionalism. The costs required for VDD are usually repaid many times over—both in the form of a discount avoided and in the form of a faster and smoother sale process.

Without VDD, the seller exposes themselves to risks that are all unnecessary: last-minute surprises, “price chipping” tactics, long-term disputes after closing, and a weaker negotiating position.

The attorneys from ARROWS, a Prague-based law firm, are experienced in preparing VDD and can guide you through the entire process—from assessing what scope of review makes sense, through cooperation with the auditor and tax adviser, to resolving identified issues and preparing a strategy for negotiations with the buyer. If you want the sale of your company to proceed professionally and with maximum protection of your position, contact the ARROWS team at office@arws.cz.

FAQ: Most common questions about Vendor Due Diligence

1. Is VDD necessary for small companies as well, or only for large ones?
VDD makes sense even for small companies. Although the cost of VDD as a percentage of the purchase price may seem higher (for a small company it can be relatively as much as several percent), the protection it provides remains just as valuable. Small companies also often have more informal documentation, and it is precisely with them that “surprises” typically arise during the buyer’s due diligence.

2. What if I am selling a company urgently—isn’t VDD too time-consuming?
VDD can also be carried out on an “express” timeline—it can be shortened to 4 to 6 weeks if the documents are ready and the company is well organised. However, urgency usually means a weaker negotiating position, because the buyer senses your pressure. ARROWS’ attorneys can help you find the right balance between speed and the quality of the review.

3. What happens if, during VDD, we discover a “deal breaker”—something with fatal consequences?
If a true deal breaker emerges (e.g., the company is not legally owned by the seller, or it is threatened by a ban on doing business), it is painful, but it is better to find out now than after the buyer has already signalled interest and invested resources into the transaction. It is possible to prepare for it, remedy something, or discuss it rationally with the buyer.

4. Do I have to prepare for VDD myself, or can the attorneys step into the processes within my company?
ARROWS’ attorneys can help you at every step—from preparing documents, through coordinating with the auditor, to analysing the findings and planning next steps. You do not have to handle anything on your own.

5. How does VDD differ from a “legal audit” of a company that owners sometimes carry out?
A legal audit usually reviews the company’s legal status for internal purposes. VDD is external, performed by an independent professional, and is specifically focused on identifying matters that will be of interest to the buyer and may affect the price and the terms of the sale.

6. What guarantee does VDD provide—will all issues really be uncovered?
VDD is not an absolute guarantee. There are things that the buyer may still discover (e.g., specific behaviour of a future customer after a change of ownership). But VDD covers typical and foreseeable risks and, in the Czech Republic, it is the best available tool to protect the seller. If the buyer later raises objections based on findings that VDD should have uncovered, you have clear evidence that you did your homework, which gives you a stronger position in any subsequent negotiations regarding claims for defects.

Notice: The information contained in this article is of a general informational nature only and is intended for basic orientation in the matter based on the legal status as of 2026. Although we strive for maximum accuracy of the content, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client security we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information from this article without prior individual legal consultation.

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