What happens during due diligence when selling a business?

Due diligence is the stage of a business sale that sellers dread the most, and understandably so. After months of preparation, marketing, and negotiation, you've agreed terms with a buyer. Now they want to go through everything with a fine-tooth comb before they commit. It can feel intrusive, slow, and frustrating.

But here's the thing: due diligence doesn't have to be painful. The sellers who find it easiest are the ones who prepared for it before the process started. The ones who find it excruciating are the ones who didn't.

What is due diligence, exactly?

In simple terms, it's the buyer's opportunity to verify that what you've told them about the business is true. They've seen your headline numbers, read the information memorandum, met you, and decided they want to proceed. Now they need to check the detail before committing legally and financially.

Due diligence typically covers five areas: financial, legal, commercial, operational, and (in regulated sectors) compliance. The buyer will usually appoint their own accountants and lawyers to lead the process, and they'll send you a list of questions and document requests. Sometimes it's a dozen items. Sometimes it's several hundred. The scope depends on the size and complexity of the business and how thorough the buyer is.

The process runs in parallel with the legal work (drafting the sale and purchase agreement), so these two workstreams tend to overlap.

How long does it take?

For most small and medium business transactions, due diligence takes between four and eight weeks from the point the buyer's advisors send their initial request list. Simpler businesses with clean records can be done in four weeks. Complex businesses, particularly those in regulated sectors or with significant property, can take twelve weeks or more.

The single biggest factor in how long it takes is you. Specifically, how quickly and completely you respond to requests. Every time a buyer's accountant sends a question and waits a fortnight for the answer, the process extends. Every document they have to ask for twice because the first version was incomplete or unclear adds time.

When we manage a sale process, one of our core jobs is keeping the seller's response times tight, because momentum matters. A buyer who's waiting for information for weeks on end starts to wonder what else might be difficult about this business.

What will the buyer's accountants look at?

Financial due diligence is the most intensive part of the process. The buyer's accountants will typically want to review:

1. Three years of statutory accounts and management accounts. They'll be looking at revenue trends, margin consistency, and whether the management accounts reconcile with the filed accounts. Discrepancies between the two are a common red flag.
2. Tax returns and HMRC correspondence. They want confirmation that your tax affairs are up to date and that there are no outstanding queries or disputes. Corporation tax, VAT, PAYE, and any sector-specific tax obligations will all be checked.
3. Adjusted earnings and add-backs. Every adjustment you've made to your reported profit will be examined and challenged. If you've added back your salary above market rate, they'll want evidence of what the market rate actually is. If you've stripped out a one-off cost, they'll want to see the invoice and confirm it won't recur. This is not adversarial. It's thorough. But if your adjustments are aggressive or poorly documented, this is where deals start to wobble.
4. Working capital. The buyer will want to understand the normal working capital requirements of the business: what cash, stock, debtors, and creditors look like on a typical day. This matters because most deals include a working capital mechanism that adjusts the final price based on the working capital position at completion. It's a technical area, but getting it wrong can cost you tens of thousands of pounds. We've seen sellers caught off guard by working capital adjustments more than once, and it's one of the areas where professional advice really earns its keep.
5. Debtor and creditor ageing. They'll check how quickly your clients pay, whether there are any bad debts or disputes, and how much you owe to suppliers. A business with consistently late-paying clients or a heavy debtor book raises questions about cash flow.
6. Revenue quality. Particularly the split between recurring and one-off income, the concentration across clients, and the contractual basis for the revenue. If a large proportion of your income comes from one or two clients, expect detailed questions about the security of those relationships.

What will the buyer's lawyers look at?

Legal due diligence runs alongside the financial review. The buyer's solicitors will typically send a detailed questionnaire covering:

Corporate structure. Confirmation that the company is properly constituted, that the share register is accurate, and that there are no outstanding shareholder issues.

Contracts. Every material contract: clients, suppliers, landlords, funders, partners. They're looking for change-of-control clauses (provisions that allow the other party to terminate if the business changes hands), unusual terms, and anything that might not survive the sale.

Employment. A full list of employees with contracts, benefits, notice periods, and any ongoing HR issues. TUPE obligations will be reviewed. If anyone is on a verbal agreement or a twenty-year-old contract that doesn't reflect current terms, now is when it becomes a problem.

Property. For leasehold premises: the remaining term, rent review dates, break clauses, and whether landlord consent is needed for assignment. For freehold: title checks, any charges or restrictions, and building condition.

Intellectual property. Trademarks, domain names, proprietary systems, and any third-party IP you're using under licence. Particularly important for businesses with a strong brand or proprietary technology.

Litigation and disputes. Any past, present, or threatened legal action. This includes employment tribunals, client disputes, and regulatory investigations. Full disclosure is essential. Hiding an issue that later surfaces is one of the fastest ways to destroy a deal, or worse, face a claim after completion.

Regulatory compliance. In sectors like care and education, this is a substantial area of its own. CQC reports, Ofsted inspections, complaints, safeguarding incidents, and the status of any conditions on your registration will all be reviewed in detail.

What are the most common problems?

After seeing dozens of businesses through due diligence, the same issues come up repeatedly.

Accounts that don't reconcile. Management accounts show one thing, statutory accounts show another, and the tax return tells a different story. This doesn't necessarily mean anything sinister, but it creates doubt, and doubt slows deals down.

Incomplete or missing contracts. Client relationships that have run on goodwill for years without a written agreement. Supplier terms that were agreed verbally. Employment contracts that haven't been updated since the person was hired. All fixable, but all easier to fix before due diligence starts.

Undisclosed issues. A tax enquiry you didn't mention. A former employee who threatened a tribunal claim. A regulatory inspection that raised concerns. Buyers understand that no business is perfect. What they can't tolerate is discovering something you should have told them about. When a seller says "I didn't think it was relevant," the buyer hears "what else haven't they told me?"

Aggressive add-backs. Add-backs that can't be substantiated, or a long list of small adjustments that collectively make the earnings figure look much better than the accounts suggest. This erodes trust faster than almost anything else.

Slow responses. Not a content issue but a process one. When the seller takes weeks to respond to requests, provides partial information, or can't find documents, it creates an impression of a business that isn't well-managed. It also gives the buyer time to get cold feet or find another opportunity.

How do I prepare for it?

The best preparation is to assemble a data room before you go to market. For sellers and buyers we work with, this is a secure online folder containing everything a buyer might ask for.

At a minimum, your data room should include: three years of statutory accounts and management accounts, tax returns and HMRC correspondence, a schedule of employees with contract summaries, copies of all material client and supplier contracts, property lease or title documents, any regulatory registrations and inspection reports, insurance policies, and a summary of any outstanding legal or HR issues.

Having this ready before a buyer asks for it does two things. It speeds up the process dramatically, and it signals to the buyer that you run a tight ship. Both of those things protect your price.

Can due diligence change the deal?

Yes, and it often does. Due diligence findings can lead to price adjustments (sometimes called "chips"), changes to the deal structure (adding warranties, indemnities, or retention clauses), or in some cases, a renegotiation of the heads of terms.

This isn't necessarily a bad thing. Minor issues are expected, and a reasonable buyer will deal with them proportionately. What you want to avoid is a major surprise that fundamentally changes the buyer's view of the business. That's when deals collapse or the price drops sharply.

The best protection against this is disclosure. If you know about an issue, tell the buyer about it early, ideally before due diligence begins. A problem that's disclosed upfront and factored into the price is manageable. The same problem discovered during due diligence feels like a betrayal.

What should I do next?

If you're thinking about selling, the most productive thing you can do right now is start getting your documents in order. You don't need to build a full data room today, but reviewing your accounts, contracts, and employment records will give you a clear picture of what's in good shape and what needs attention.

Our free valuation calculator can give you an initial sense of what your business might be worth. If the range is interesting and you'd like to talk through what preparation would look like for your specific situation, James is always happy to have a confidential conversation.