Conduct business acquisition due diligence

Three types of due diligence

Due diligence is your detailed investigation to verify the seller's claims and identify hidden risks. Most business acquisitions require all three types.

Why due diligence matters

Thorough due diligence:

• Validates the purchase price: Confirms financial performance justifies valuation
• Identifies deal-breakers: Uncovers issues that would make you walk away
• Strengthens negotiation: Problems discovered give you leverage to renegotiate price
• Informs integration planning: Understand what you're buying before completion
• Reduces post-acquisition surprises: Fewer nasty shocks after you own the business

Common due diligence red flags

Financial red flags

• Revenue concentration: Over 50% from one or two customers (customer loss risk)
• Declining margins: Shrinking profitability despite stable revenue (cost pressures)
• Unexplained adjustments: Seller adds back expenses as "one-off" to inflate EBITDA
• Poor cash conversion: Profit on paper but no cash generated (working capital issues)
• Related party transactions: Payments to directors or connected companies (profit extraction)

Legal red flags

• Pending litigation: Ongoing legal disputes with customers, suppliers, or employees
• IP ownership unclear: Trademarks not registered, copyright disputes, licensing issues
• Regulatory non-compliance: Missing licenses, health & safety violations, environmental breaches
• Contractual restrictions: Key contracts don't allow transfer or require customer consent
• Employment issues: Unfair dismissal claims, TUPE complications, unpaid holiday liabilities

Commercial red flags

• Customer dissatisfaction: Poor reviews, high churn rate, complaints escalating
• Supplier dependency: Single-source suppliers with no alternatives (supply chain risk)
• Technology obsolescence: IT systems outdated, cybersecurity weak, digital capabilities poor
• Market decline: Industry in structural decline, new competitors disrupting
• Key person dependency: Business relies entirely on owner or one salesperson

Due diligence timeline and process

Typical due diligence takes 4-6 weeks for a small to medium business. Larger or more complex businesses may take 8-12 weeks.

Week 1-2: Information request and data room setup

• Your advisors send comprehensive information request to seller
• Seller uploads documents to virtual data room (VDR)
• Initial review of accounts, contracts, and corporate documents
• Site visits and management interviews scheduled

Week 3-4: Detailed investigation

• Accountant analyses financial records and prepares due diligence report
• Solicitor reviews legal documents and identifies issues
• Commercial due diligence (if applicable) - customer interviews, market analysis
• IT systems review, premises inspection, stock count

Week 5-6: Issue resolution and reporting

• Advisors compile findings and recommendations
• Negotiate resolutions to identified issues (price reduction, indemnities, warranties)
• Final decision: proceed, renegotiate, or walk away
• If proceeding, begin Sale and Purchase Agreement negotiation

Professional advisors you need

Buying a business is complex. Don't attempt it without expert advice.

Essential advisors

Optional advisors (for larger transactions)

• Business broker: Finding opportunities, valuation guidance, negotiation support (5-10% of price, paid by seller)
• Commercial due diligence provider: Market analysis, customer research, competitor intelligence (£5,000-£25,000+)
• Technical specialists: IT systems review, property surveyor, environmental consultant, IP attorney (varies by need)

Budgeting for professional fees

As a rough guide, budget 3-5% of the purchase price for professional fees. For a £100,000 business acquisition, expect £3,000-£5,000 in advisor costs. Larger or complex deals will be proportionally more expensive.

Don't be tempted to cut corners on professional advice to save fees. The cost of buying a bad business far exceeds advisory costs.