Due diligence (“DD”) in a business sale is the comprehensive, post-offer investigation process where a buyer verifies the seller's financial, legal, and operational data to assess risks, validate valuation, and ensure accuracy before closing.
It typically lasts 30–90 days, covering assets, liabilities, contracts, and staff, and is used to negotiate final terms or renegotiate price.
The level of work and detail required is significant, together with the follow-up queries, the ongoing updates, and the tight time frame, when you need to continue to operate your business.
The key areas that a buyer will engage advisors to look at are:
1. CLEAN OWNERSHIP & STRUCTURE
A buyer wants certainty. That means a crystal-clear share capital table, with shares issued correctly, up-to-date shareholder/ LLP agreements with no hidden restrictions for a particular shareholder(s) which could slow the deal.
2. GOVERNANCE IN GOOD ORDER
Buyers expect flawless company records - from statutory filings to board minutes. Strong governance inspires confidence and protects valuation. We are seeing solicitors review share ownership, to check legally correct, and no tax risks regarding employment related securities, from the date of incorporation.
3. REGULATORY AND FINANCIAL COMPLIANCE
Regulatory approvals, tax compliance, and sector-specific obligations must all be watertight. Any gaps here can stall the deal or trigger price negotiations.
4. TRANSFERABLE COMMERCIAL CONTRACTS
Client and supplier contracts need to be assignable or robust against change of control provisions. The smoother the handover, the stronger the buyer appetite. If client contracts can’t be transferred, then this will significantly impact value.
5. EMPLOYMENT AND PEOPLE RISKS
From employment contracts and bonuses to TUPE and restrictive covenants, people- related matters often define the risk profile of a transaction, particularly in services businesses, as employees are a key asset of the business.
6. IP AND DATA OWNERSHIP
Ensuring the company owns its intellectual property and meets GDPR obligations is essential. Any uncertainty around IP rights can be a deal breaker. If you do not own the IP on which the business is built, what value is there in the business, which is common, where the founder keeps the IP in their personal name.
7. LITIGATION AND LEGACY LIABILITIES
Active disputes, insurance coverage, and historic claims all influence warranties, indemnities and ultimately the final price.
8. DEAL STRUCTURE AND TAX EFFICIENCY
Whether it is a share sale, asset sale, earn out or rollover equity, tax and structuring decisions have a major impact on what sellers ultimately take home.
Before a buyer signs on the dotted line, they’ll want to know as much detail as possible about the company they are purchasing, so you cannot avoid DD. It is a painful (but necessary) part of the sale process.
Housekeeping is a vital part of sale preparation and the more you address this will minimise the time and pain during the DD process.
Tidying and decluttering is part of the housekeeping process, but making sure your tidy, organised records are easy to access will help the due diligence run more smoothly. For example, if you have gone to the trouble of making sure all employees have got up-to-date contracts, or that shareholding records are current, make sure to put them all in one place.
Moral of the article - plan as the business grows, try and keep records up to date, and make sure these records are saved down. Be prepared to accept the pain of DD!
