Due diligence, from your side of the table
The stage where deals collapse. What they will ask for, where things actually go wrong, and what to fix now rather than in month four.
You have agreed a price and you would like to still be getting it four months from now. Due diligence is the period after you agree, when the buyer's advisors examine everything and decide whether that price still stands. In our experience it runs two to four months for a business of this size.
It is the stage owners fear most and they are right to. This is where deals die and where prices get reduced. Usually not because something terrible is uncovered, but because a series of small unresolved things accumulate until they add up to a reason to renegotiate.
Almost everything published on this subject is the buyer's checklist. This is written from your side. The single most useful thing to understand is that everything they will find is already true today. The only variable is whether you find it first.
What actually happens
Once heads of terms are signed, the buyer instructs advisors and you open a data room. From that point you are running two jobs at once: the business, and a process that will consume more of your week than anyone told you.
- Financial due diligence. Accountants reconstruct your numbers from source records. They will rebuild your EBITDA themselves, test your adjustments, and reconcile management accounts against statutory accounts and tax filings. This is the workstream that most often changes the price.
- Legal due diligence. Lawyers read every contract, lease, licence and employment agreement you have. They are looking for anything that does not transfer, anything that terminates on a change of ownership, and anything that is not written down.
- Commercial due diligence. On larger deals, a consultancy examines your market, your competitors and your customer relationships. They will sometimes ask to speak to your customers. That request needs handling carefully, and you are entitled to control the timing.
- Tax due diligence. Historic exposures. Payroll treatment, contractor classification, cross border arrangements and value added tax positions.
What they will ask you for
The core request list, in the order it usually arrives
- Three to five years of statutory accounts, and monthly management accounts for the same period.
- A reconciliation between the two, which is where the first problems usually appear.
- The detail behind every EBITDA adjustment you have claimed, with documents.
- An aged debtor and creditor listing, and a stock listing with ageing.
- Every customer contract, with the top ten by revenue examined line by line.
- Every supplier contract that is material or exclusive.
- All employment contracts, the payroll file, and details of anybody working for you who is not on the payroll.
- Property leases, and any arrangement where you or a family member is the landlord.
- Bank facilities, finance agreements, guarantees and any charges registered over the business.
- Insurance history and any claims, litigation or disputes, including threatened ones.
- Licences, permits, certifications and their renewal dates.
- Details of any related party transactions, meaning anything the company does with you, your family or another company you own.
Where deals actually die
- The numbers do not reconcile. Management accounts say one thing, statutory accounts another, and the tax filings a third. Each difference has an explanation and you know most of them. The problem is that a buyer cannot tell an explanation from an excuse, and every unreconciled line becomes a reason for caution.
- Customer contracts do not exist. You have worked with your largest customer for eleven years on a handshake and a purchase order. That is normal, and it is worth very little to a buyer, because there is nothing to transfer and nothing to stop the customer leaving the week after completion.
- A change of control clause. A contract that terminates, or requires the other party's consent, when the company changes hands. Find these before the buyer does. Asking a customer for consent is a conversation you want to plan, not one you want to have under time pressure at the request of somebody else's lawyer.
- Employment problems. Long standing contractors who are legally employees. Verbal promises about bonuses or retirement. Unrecorded holiday entitlement. None of these are unusual. All of them are quantifiable, and every one of them comes off the price if you did not raise it first.
- The adjustments do not survive. You claimed €140,000 of add backs and the accountants accept €60,000. At a multiple of six that is €480,000 of value gone, after you had already told your family what the business was worth.
- Something undisclosed appears. This is the one that ends deals outright. Not because the issue is fatal, but because the concealment is. Once a buyer believes you have withheld one thing, they reprice everything they cannot personally verify, and that is most of the business.
- The owner runs out of energy. Rarely written down and genuinely common. Four months of daily requests, while still running the company, while the buyer's advisors question decisions you made a decade ago. Deals fail because people stop wanting them. Plan for this in advance by getting help, not by intending to be resilient.
The adjustments are the most contested part of the whole process, so it is worth knowing in advance which of yours will hold and which will not. EBITDA and normalisation
What to fix, and when
Almost everything above is cheap to fix two years out and expensive to fix during a process. This is the whole argument for preparing early, and it is a financial argument rather than a tidiness one.
- Two years out. Get written contracts with your largest customers, at renewal, as a matter of ordinary business. Regularise anybody working for you who is not properly on the payroll. Put a written lease in place if you own the premises personally. Each of these is routine now and a negotiating point later.
- Twelve months out. Reconcile your management accounts to your statutory accounts every month and keep the working. Start documenting your EBITDA adjustments as they occur, with the invoice attached, rather than reconstructing them later from memory.
- Six months out. Run your own diligence. Commission a vendor review, or at minimum work through the request list above and answer it yourself. Whatever you find, the buyer will find. Finding it first converts a price reduction into a disclosure.
- Before you sign heads of terms. Build the data room. Write the disclosure list. Decide who is handling the process day to day, because it cannot be only you, and agree with your accountant what their involvement will cost before it starts.
How to behave once it starts
The things that materially change the outcome
- Answer quickly. Slow responses are read as concealment, even when they are only a busy week. A same day acknowledgement with a realistic date is worth more than a fast answer.
- Disclose early and in writing. A problem you raise is a fact. The same problem discovered is a warning sign, and it gets priced as one.
- Never guess. If you are not certain, say you will confirm. A confident wrong answer that surfaces four weeks later damages more than the original question ever could.
- Keep one list of every open item, and share it. Controlling the list is the closest thing to controlling the process.
- Protect your own time. Somebody other than you should be assembling documents, or the business will suffer and the business suffering is the more expensive problem.
Warranties and the disclosure letter
You will be asked to give warranties, which are statements about the business that you are promising are true. If one turns out to be false, the buyer can claim against you, in some cases years after you have spent the money.
The disclosure letter is your protection, and it is the most important document you will sign after the sale agreement itself. Anything you disclose properly cannot later be claimed against under the warranty it relates to. So the disclosure letter is not an admission of weakness. It is the mechanism that converts a risk into a known fact the buyer accepted when they paid.
The practical consequence is that owners who are open during diligence are usually better protected afterwards than owners who were careful about what they volunteered. Being straightforward is not only the decent approach here. It is also the one that limits your liability.
Know what will be tested before anyone tests it
Most of what due diligence examines is what drives the valuation in the first place: customer concentration, the quality of your numbers, how much of the business is you, and whether your adjustments hold.
The valuation is free and takes about ten minutes. It will show you which of those are already working against your number, which is the same list a buyer's accountant will arrive with.
Step one of three: see your number, free, with no account and no name.
See what it's worth