Due Diligence When Selling a Business in the UK: What to Expect
Due diligence is the stage of the business sale process where the buyer and their advisers verify everything you have told them about your business before committing to the purchase. It covers the financial position, the legal structure, the commercial model and, depending on the type of business, the operational, technical or regulatory position as well.
For well-prepared sellers, due diligence is a manageable and relatively straightforward process that confirms what has already been disclosed. For underprepared sellers, it is one of the most common points of deal failure in the entire UK business sale market. Problems discovered in due diligence either kill deals entirely or are used by buyers to renegotiate the price after months of time and legal costs have already been invested.
This guide explains exactly what due diligence involves when selling a business in the UK, how long it takes, what buyers and their advisers look for and how to prepare so that your due diligence runs smoothly and your deal completes.
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What Is Due Diligence When Selling a Business?
Due diligence is the formal investigation process a buyer undertakes after an offer has been accepted and heads of terms have been signed, before the legal documentation is finalised and the transaction completes. It is the buyer's opportunity to verify that the business is as described, that the financial performance reported is accurate and sustainable, and that there are no undisclosed liabilities, legal issues or risks that would materially affect the value or operability of the business after purchase.
Due diligence is almost always conducted by the buyer's professional advisers rather than by the buyer personally. A specialist accountant conducts the financial due diligence. A solicitor experienced in business acquisitions conducts the legal due diligence. For some businesses, additional specialist advisers are instructed to cover commercial, technical, regulatory or environmental due diligence.
What Does Financial Due Diligence Cover?
Financial due diligence is typically the most intensive element of the process for most UK SME business sales. The buyer's accountant will review and verify the financial information you have provided, typically covering the following areas.
Three to five years of statutory accounts, to understand the financial trajectory of the business and identify any significant movements in revenue, profit or balance sheet items that require explanation. Management accounts for the current trading period. The adjusted earnings calculation you have presented, with supporting evidence for every add-back. Working capital levels and the normalised working capital requirement for the business. The debtors and creditors position. Any significant capital expenditure commitments. Tax compliance, including VAT, PAYE, corporation tax and any outstanding HMRC queries. Pension liabilities. Related party transactions.
The buyer's accountant will produce a financial due diligence report summarising their findings and highlighting any areas of concern. Issues identified in this report are the most common basis for post-offer price renegotiation. The better your financial records and the cleaner your adjusted earnings calculation, the less ammunition buyers have to renegotiate after the event.
What Does Legal Due Diligence Cover?
The buyer's solicitor will review the legal structure and position of the business, typically covering the following areas.
The company's constitutional documents. All significant commercial contracts, including customer contracts, supplier agreements and distributor or agency agreements, with particular attention to change-of-control clauses that may require third party consent to the transaction. Property leases and the terms on which they are held. Employment contracts and terms for all key staff. Intellectual property ownership and registration. Any ongoing or threatened litigation or disputes. Regulatory licences and permits required to operate the business. Data protection compliance. Environmental matters where relevant to the sector.
Change-of-control clauses in key contracts are a particular area of risk. If a significant customer contract contains a clause that allows the customer to terminate on a change of ownership, this is a material risk that will affect buyer confidence and potentially the price. Review all key contracts for change-of-control provisions before going to market and address any issues as part of your preparation.
How Long Does Due Diligence Take?
For a well-prepared small to mid-sized UK business with a complete data room, due diligence typically takes four to eight weeks from the point when all information has been provided to the buyer's advisers. For a larger or more complex business, or one where the seller is slow to respond to information requests, the process can take three to five months.
The biggest controllable factor in due diligence duration is the speed and completeness of your responses to buyer requests. Every day a buyer's adviser waits for information is a day the timeline extends and the buyer's enthusiasm and commitment erodes. Prepare your data room completely before going to market and commit to responding to all due diligence requests within twenty-four hours of receiving them.
How to Prepare for Due Diligence
The most effective preparation for due diligence is to conduct your own pre-sale due diligence before you go to market. Review your business from a buyer's perspective and identify every issue that a buyer's adviser is likely to find. Then either resolve the issue before listing or prepare a clear and honest explanation of it.
Build a complete data room before your listing goes live. A data room is a secure online folder containing all the key documents a buyer will need during due diligence, organised clearly and logically. The core contents of a business sale data room are three to five years of statutory accounts, recent management accounts, the last three years of tax returns and any HMRC correspondence, all key commercial contracts, property leases, employment contracts for senior staff, intellectual property registrations, details of any litigation or disputes, regulatory licences and permits, and the company's constitutional documents.
Having a complete data room ready before you receive an offer means that when an offer arrives and due diligence begins, you can provide all the core information within days rather than weeks. This accelerates the process, maintains buyer momentum and significantly reduces the risk of deal failure.
For a complete guide to the preparation stage, read our article on preparing your business for sale in the UK.
Common Due Diligence Issues and How to Handle Them
The most common issues discovered in due diligence for UK SME business sales are: inconsistencies between reported management accounts and statutory accounts; owner add-backs that cannot be substantiated with documentary evidence; change-of-control clauses in key customer contracts; HMRC queries or compliance gaps; key staff without written employment contracts; intellectual property not clearly owned by the company; and property leases with onerous terms or pending renewals.
Each of these is manageable if identified and addressed before due diligence begins. Each of them is significantly more damaging if discovered by the buyer's advisers after you have failed to disclose them. Transparency is always the right approach. A seller who proactively discloses a known issue with a clear explanation and, where possible, a resolution, is in a far stronger position than one whose undisclosed issue is uncovered by the buyer's team.
Frequently Asked Questions
What is due diligence when selling a business?
Due diligence is the formal investigation process a buyer conducts after an offer is accepted to verify the financial position, legal structure and commercial model of the business before legal completion.
How long does due diligence take when selling a business in the UK?
For a well-prepared business with a complete data room, four to eight weeks is typical. For an underprepared business or one where the seller is slow to respond to information requests, the process can take three to five months.
How do I prepare for due diligence?
Build a complete data room before listing. Conduct your own pre-sale review to identify issues in advance. Resolve what you can and prepare honest explanations for what you cannot. Commit to responding to all buyer requests within twenty-four hours. Read our complete guide on preparing your business for sale in the UK.
What happens if due diligence finds a problem?
Issues found in due diligence typically result in one of three outcomes: the buyer accepts the issue and proceeds on the agreed terms; the buyer uses the issue to renegotiate the price; or the buyer withdraws from the transaction. The outcome depends on the severity of the issue and how it was handled by the seller. Proactive disclosure before due diligence begins is almost always better than discovery during the process.
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This article provides general information only and does not constitute legal, financial or professional advice. Always obtain independent professional advice before making decisions about selling your business.