Due diligence checklist for sellers: what a UK buyer will ask for

Where due diligence fits in a sale

A sale usually runs in a set order: an anonymous teaser to interested buyers, a confidentiality agreement, an information memorandum, offers, then heads of terms with one buyer. Due diligence starts after heads of terms, when the buyer and their accountants and lawyers test what they’ve been told.

It is rarely quick. KBS Corporate, a business sale broker, says buyer due diligence often takes around 4 to 10 weeks from the first request list, and incomplete records tend to stretch it. On larger deals, some sellers commission their own vendor due diligence report in advance; FD Capital, a firm that places finance directors and CFOs, says a combined vendor programme typically runs 8 to 14 weeks from engagement to final reports.

The request list itself is usually long, and most of it is routine. The questions that slow a deal down tend to come from a handful of places, and those are what the sections below focus on.

Financial: the accounts, and whether they agree

The buyer’s accountants start with the numbers, because the price in the heads of terms rests on them. Unbiased, a service that matches people with financial advisers, says buyers expect detailed records and tax returns going back at least three years.

Add-backs draw the closest reading. An add-back is a cost in the accounts that a new owner would not carry, such as a one-off legal bill or an owner’s salary above a market rate. Buyers typically accept the ones with clear evidence and challenge the ones that recur every year. There is more on this in the EBITDA add-backs guide.

Commercial: customers, suppliers and the pipeline

Commercial diligence asks whether the revenue will still be there after completion. The questions are usually about concentration and contracts.

• Revenue by customer for each year, often with the top ten named once the buyer is under confidentiality.
• Customer contracts, renewal dates, notice periods and any change-of-control clause that lets a customer walk away on a sale.
• Key supplier terms, especially where there is only one source for something the business depends on.
• The current pipeline or order book, and how the current year is trading against budget.
• Pricing history and any discounts or rebates agreed with large customers.

Buyers also ask about the market itself: who the main competitors are, why customers choose the business, and whether any revenue depends on a contract, a licence or a person that might not carry over. Short written answers to these, prepared before the request list arrives, tend to save several rounds of follow-up questions.

Concentration is a standard question rather than a problem in itself. A buyer who sees one customer at a third of revenue will ask how long the relationship has run, what the contract says, and who at the business holds it.

Legal, people and property

The buyer’s solicitors work through the company’s legal records alongside the accountants. The requests are predictable, and gaps here are often simple to fix if found early.

• Statutory registers, articles of association and a clear record of who owns the shares.
• Employment contracts, salaries, benefits, pension arrangements and any disputes or claims.
• Leases for every property, with break dates, rent reviews and dilapidations terms.
• Ownership of intellectual property: trade marks, domain names, software and designs, and whether anything was created by contractors without an assignment.
• Insurance policies, claims history, licences and any regulatory permissions the business needs to trade.
• Current or threatened litigation, and data protection records where the business holds personal data.

Buyers also ask how the business runs without its owner. Expect questions about who holds the key customer relationships, who could step in for the owner day to day, and what happens during a long absence.

Tax

On a share sale the buyer takes on the company’s tax history, so tax diligence looks back several years. Typical requests cover corporation tax returns and computations, VAT returns, PAYE records, any HMRC enquiries, and the treatment of benefits and expenses paid to directors.

Findings here usually lead to a warranty or an indemnity in the sale agreement rather than a change to the deal itself. The seller’s own tax position on the sale is a separate matter for their accountant or tax adviser.

Diligence also feeds the sale agreement more widely. The seller gives warranties, statements about the business that the buyer relies on, and answers them with a disclosure letter listing the exceptions. Anything found and disclosed during diligence is usually dealt with there, which is one reason buyers’ solicitors ask for so much in writing. Each side’s solicitor advises on how this works for a particular deal.

How sellers commonly prepare

Most of the time in diligence goes on answering questions, not sending documents. That is why much of the useful preparation is finding the questions before the buyer does.

Illustrative example, invented round numbers: a business with £2m turnover, £300k operating profit and £80k of add-backs. Its largest customer is 35% of revenue, the management accounts show £20k more profit than the filed accounts, and the owner has never been away for more than a week. A buyer will typically ask about each of those four things before anything else.

Common steps are to gather three years of accounts in one place, reconcile the filed and management figures, attach a document to every add-back, and check that contracts, leases and share records are signed and current. An accountant or corporate finance adviser can say which of these matter most for a particular business, and it is worth taking their advice before a buyer’s list arrives.

The free readiness check takes nine figures an owner already knows and lists what a buyer is likely to question about them; it does not value the business. Once a deal is under way, teasr’s data room keeps a buyer’s requests, the documents released against them and the Q&A in one place, with a record of who opened what.