Many organizations must work with privately held vendors to meet an operational need. As organizations seek or have these relationships, there are some unique challenges when it comes to assessing a private vendor’s financial health. Unlike publicly traded vendors that are obligated to release their financial documents to regulatory agencies to be listed on stock exchanges, private vendors don’t have this requirement. Therefore, they can sometimes be reluctant to disclose information during the due diligence process.
This lack of cooperation and responsiveness from private vendors regarding their financial information can be overcome through tailored approaches, organization from your team, and alternative data and documents you can use to perform your financial due diligence. But how do you begin the process? Are there guidelines on what documents or details to collect or request from a private company? Let’s review these questions and more.
When dealing with private vendors, ensure you have a response for how and why you’re requesting their financial documentation. This can help assuage a private vendor’s concern that they’re sharing confidential information that can be leaked or shared with parties other than your organization.
Be prepared to address how you will store their financial data and limit access to only the subject matter experts (SMEs) on your team or your outsourced team that will be reviewing this information. Also, explain to your vendor why you need this information. This will provide additional context and explanation to give the private vendor more assurance on the importance of providing their financial information.
Example: You might communicate something like, “You’re a critical vendor to my operations, and given you provide a product/service that my organization depends on, I need to best understand your financial health and viability. Once I understand this aspect of your organization, I can be comfortable with my contract with your team and your ability to fulfill that contract without any downstream issues or interruptions in the product/service due to potential financial health concerns.”
If the vendor still declines to disclose certain documents and you’re uncomfortable using a third-party credit report, you can always reach directly out to the private vendor and suggest other avenues. One example might be to conduct a diligence call or webinar between your organization/financial experts and the private vendor’s executives, CFO, or other knowledgeable team members with the private vendor that are aware of its financial health and standing.
Tip: Defining the Scope
Due diligence should always be risk-based, which means a financial assessment probably won’t be necessary for every vendor. In general, it’s important to create a list of standard items to collect in your due diligence processes. This includes some financial documentation to gather from all vendors, both public and private. This helps to streamline your processes and get repeatable, scalable actions in your vendor risk management program during your onboarding and ongoing due diligence activities.
For financial health assessments, here’s a good rule of thumb to keep your due diligence scope focused, effective, and efficient – focus on performing financial assessments on all your critical and/or high-risk vendors (regardless of whether they may be publicly held or privately held).
Once you’ve gathered whatever you can on the private vendor, make sure you’re organized on what information you should review with scrutiny. Financial documents contain a lot of details, so it’s essential that they’re assessed by a qualified SME and that the SME or your organization has a templated, organized approach that is consistent from vendor to vendor (even between public and private vendors).
At times, based on the information received from a private vendor, you may have to develop multiple standardized approaches that consider the availability and depth of the data provided to your organization. Nevertheless, it’s important to focus on the three primary financial statements: the balance sheet, the income statement, and the cash flow statement.
No one metric is a tell-all about a private vendor’s financial health and standing, so having multiple metrics can ensure you’re comprehensively evaluating their financial viability and identifying where potential risks may exist in the private vendor’s financial profile.
To keep your execution tight and limit time spent on reviewing too much detail, it’s essential to tailor your review and focus on some of the most critical items within each of these key statements, listed here:
Unfortunately, there is no single comprehensive and official checklist to be applied for every vendor that is assessed within your risk management program. However, there are common best practices we have listed here that you can apply and utilize as you see fit during your financial due diligence workflows.
Here are some questions and guidelines to consider as you perform/look to perform financial health assessments on your private vendors:
A vendor’s financial health should be thoroughly assessed, regardless of its status as a private or public company. Private vendors may require a little extra work to evaluate, but it’s an essential process that helps you avoid some significant risks that can impact your operations.