Due Diligence When Selling a Business: What Buyers Check

In short: Due diligence is the buyer's investigation of your business after heads of terms are agreed and before the sale agreement is signed. It usually runs across financial, tax, legal and commercial areas, and its purpose is to confirm that what the buyer has been told is true and to find anything they have not been told. For a seller the financial side matters most, because it tests whether your profit is real and repeatable, and whatever it turns up tends to come off the price or be held back from it. Most of what decides how it goes is fixed long before a buyer arrives.

Owners often think of due diligence as the paperwork that follows a deal. In practice it is where many deals are reshaped, and occasionally where they end. This article looks at the process from the seller's side, with a focus on the financial information buyers ask for and what their accountants are looking for. For the wider preparation that comes before a sale, see our complete guide to business exit planning.

What is due diligence when selling a business?

Due diligence is the period in which a buyer and its advisers examine your business in detail before committing to the purchase. It normally begins once heads of terms have been agreed, often with a period of exclusivity during which you cannot negotiate with anyone else, and it runs alongside the drafting of the sale agreement.

The buyer sends a request list, you provide documents, usually through an online data room, and then answer written questions as their advisers work through what you have supplied. The government backed NI Business Info guide to due diligence when selling gives a useful overview of the stages.

It is not a formality. What the buyer finds feeds directly into the price, the structure of the deal and the protections they ask for in the sale agreement.

What does due diligence cover?

Most buyers investigate several areas at once, each led by different advisers.

The depth depends partly on how the deal is structured. In a share sale the buyer takes on the company with its entire history, so the investigation tends to go further than in an asset sale, where the focus is on the specific assets and liabilities being transferred.

What financial information do buyers need?

The financial request list is usually the longest. While every list differs, most cover the same ground:

• Statutory accounts for several years, along with the records behind them
• Monthly management accounts for the recent period, reconciled to the statutory figures
• Revenue and margin broken down by customer, product or service line
• Aged debtor and creditor listings, stock records and the working capital position
• Payroll records, director remuneration and any related party transactions
• Corporation Tax, VAT and PAYE returns, and correspondence with HMRC
• Forecasts and the assumptions that sit behind them
• Details of borrowing, leases, guarantees and other commitments

The list itself is rarely the problem. The difficulty is producing it quickly, consistently and in a form where figures from different sources agree. A buyer who receives three different versions of last year's profit stops trusting all of them, including the correct one.

Why do management accounts matter so much in due diligence?

Statutory accounts tell a buyer about a year end that may be many months old. Buyers price from recent trading, and recent trading is only visible in your management accounts. If monthly figures arrive late, change when questioned or do not reconcile to the year end, the buyer cannot rely on recent performance. They either discount it or move more of the price into deferred payments that depend on results after completion.

Consider a Newcastle IT support company whose monthly figures come from a spreadsheet kept by the owner, with the accountant making year end adjustments that never flow back into the monthly numbers. The business may be genuinely profitable, but the gap between the two sets of figures becomes the buyer's first question, and every answer slows the deal down.

This is not about the sophistication of the reports. It is about consistency over time. Monthly management accounts that reconcile to the statutory accounts across several periods are one of the strongest signals a buyer can receive, and well configured accounting systems are usually what makes that possible.

What does a buyer's accountant look for?

The central question is whether the profit you report is real and repeatable. A buyer's accountant will look at how revenue is recognised, whether costs have been deferred, how one off items have been treated, what has been run through the company for the owner's benefit and how closely profit turns into cash. Where you have presented adjusted EBITDA, every adjustment will be tested against the evidence behind it.

They will also establish the company's net debt and its normal level of working capital, both of which feed directly into what is paid for your shares. Our guide to working capital in a business sale explains why that part of the review so often moves money late in a deal.

On tax, the focus is compliance history and exposure. Common areas of interest include the treatment of benefits through payroll, VAT positions and any reliefs the company has claimed. Because a buyer of shares inherits the company's tax history, an issue found here commonly leads to a specific indemnity in the sale agreement. Your own position on the proceeds, including whether Business Asset Disposal Relief is available, is a separate question, but it depends on the same structure and records.

If you want to know what a buyer's accountant would find in your figures before one looks, our exit planning team starts with exactly that review.

What happens when due diligence finds a problem?

Few findings end a deal outright. Most change its terms. The buyer may reduce the price, hold part of it back as a retention against a specific risk, ask for an indemnity covering a particular liability, move more of the consideration into deferred or performance linked payments, or seek wider warranties in the sale agreement. During exclusivity they can also simply walk away.

The difficulty is timing. By this stage you have usually agreed exclusivity and turned away other interest, so negotiating power has shifted towards the buyer. The same issue identified and resolved before going to market would usually have cost far less, and often nothing at all.

The sale agreement adds a further layer. It contains warranties, which are statements about the business you confirm to be true, and your solicitor prepares a disclosure letter setting out the exceptions. Because that letter draws heavily on the information produced during due diligence, the accuracy of your financial records affects your exposure long after completion.

How do you prepare for financial due diligence?

The most effective preparation happens before heads of terms, ideally before you go to market at all. That means monthly reporting that reconciles to the statutory accounts, evidence supporting any adjustments to profit, director loan and related party balances that are resolved or clearly documented, tax compliance that has been reviewed rather than assumed, and information organised so it can be produced quickly when asked for.

On larger transactions some sellers go further and commission a vendor due diligence report, an independent review carried out on the seller's side and shared with prospective buyers. Whether that is worthwhile depends on the size of the deal and the likely buyers.

What no list can tell you is which issues in your own business matter most, which are better resolved and which are better disclosed, and how long each will take to put right. Getting that order wrong uses up time you may not have once a buyer is interested. If you are still shaping your plans, our guide on building a business exit strategy is a good starting point, and the Exit Readiness Scorecard shows how prepared your business is today.

How can Pulse help?

We review your financial position the way a buyer's accountant would, well before one does. That includes reconciling management and statutory accounts, testing the adjustments behind your profit figures, reviewing tax compliance and understanding your working capital, so that problems are found while there is still time to deal with them on your terms.

When a sale is under way, we help you produce the financial information buyers ask for and answer their accountants' questions, working alongside your solicitor. Where you need a defensible figure before speaking to buyers, our business valuation work sets one out with its assumptions stated, and our tax advisory team reviews the structure around the sale.

To see how due diligence fits into the wider picture, read our business exit planning guide, or talk to our team about how your own figures would stand up to a buyer.

FAQs

What is financial due diligence?

Financial due diligence is the part of a buyer's investigation that tests the target company's financial information. It checks whether reported profit is accurate and sustainable, how cash and working capital behave, what debts and commitments exist, and whether the figures in the accounts, management reports and forecasts agree with one another.

How long does due diligence take when selling a business?

It varies with the size and complexity of the business, the type of buyer and how quickly the seller can produce information. Clean, well organised records shorten it considerably. Missing or inconsistent information extends it, and a longer process gives the buyer more opportunity to revisit the terms.

What financial information will a buyer ask for?

Typically several years of statutory accounts, recent monthly management accounts that reconcile to them, breakdowns of revenue and margin, debtor and creditor listings, payroll and director remuneration, tax returns and correspondence, forecasts with their assumptions, and details of borrowing, leases and other commitments. The exact list depends on the business and the buyer.

Who pays for due diligence when selling a business?

Each side normally pays its own advisers. The buyer pays for the investigation carried out on its behalf, and the seller pays its own accountants and solicitors for producing information and negotiating the outcome. Sellers who commission their own review before going to market also bear that cost.

Can a buyer reduce the price after due diligence?

Yes. Heads of terms are usually not binding on price, so issues found during due diligence are commonly used to reduce the price, hold part of it back as a retention, or require specific indemnities in the sale agreement. Problems identified and dealt with before a sale give the buyer far less room to do this.

What is a data room?

A data room is a secure online space where the seller places documents for the buyer and its advisers to review during due diligence. It controls who sees what, records access and keeps information organised. A well structured data room prepared in advance speeds up the process and gives a buyer an early impression of how well the business is run.