Due diligence, and keeping the funding intact while you do it

What diligence is for

Everything a buyer knows about a business before diligence has been told to them by someone with an interest in selling it. That is not an accusation. It is the structure of the situation, and diligence exists to convert assertion into evidence.

It has three outcomes, all of them legitimate. The deal proceeds as agreed because what was said turns out to be true. The deal proceeds on changed terms because something was found. Or the deal stops. Buyers sometimes treat the third as a failure. It is the process working: the cheapest deal you ever do is the bad one you walked away from.

There is a fourth outcome nobody plans for and it happens often enough to prepare for: the deal proceeds and the funding does not, because the lender learned about a finding after it had committed. Keeping the funder alongside the process is as much a part of diligence as the diligence itself.

The four streams

Financial. Usually the largest piece and normally carried out by a reporting accountant rather than by the buyer. It tests the quality of earnings: whether the profit is real, whether it recurs, whether the add-backs presented by the seller survive scrutiny, and whether profit turns into cash. It examines the debtor and creditor ledgers and their ageing, the tax position including anything unresolved with HMRC, the working capital cycle, and the capital expenditure the business genuinely needs rather than what it has been spending. It also breaks revenue down by customer, so concentration stops being an impression and becomes a number.

Legal. Run by your solicitor. Company records and title to the shares, the customer and supplier contracts and what happens to them on a change of control, the property position and the lease terms, employment contracts and anything owed to staff, pensions, litigation live or threatened, intellectual property and the trading name, and insurance including whether past liabilities are covered once the seller has gone. In a share purchase this is a much larger exercise than in an asset purchase, for the reasons set out in share purchase versus asset purchase.

Commercial. Frequently done by the buyer themselves, and frequently the most valuable. Who are the customers, why do they buy, and would they stay under new ownership? What does the competition look like locally? Is pricing sustainable or has work been taken cheaply to hold volume? What is the renewal rate on contracts, and what is the pipeline?

Technical and operational. The stream most often skipped and the one that produces the nastiest surprises in trade services. Whether accreditations and approvals transfer, and what has to be re-obtained under new ownership. Whether the qualification that lets the business trade sits with a named individual who is leaving. Compliance history, safety records, equipment condition and remaining life, and the state of the systems the work is actually managed in. In fire and security and electrical and M&E the certification is a large part of what is being bought, and losing it is not a discount, it is a different business.

What the lender does separately

A lender runs its own process, and it is narrower and differently aimed. It is not trying to decide whether the business is a good purchase. It is trying to decide whether the debt gets repaid.

So it concentrates on the rebuilt earnings figure, on the reliability of the cash that services the loan, on the security available and its value, on the buyer's ability to run the business, and on what happens in a downside case. It will usually want to see the financial diligence report, sometimes addressed to it or with reliance given, and it will want the legal work on security completed by its own solicitor at the borrower's cost.

The practical point is that the lender's timetable is not the same as the buyer's, and it starts later, because it depends on outputs from the buyer's process. Building that dependency into the plan is the difference between a timetable that holds and one that does not, which is covered in timelines.

Sequence, and what to do before spending money

Diligence is expensive, and much of it is spent before anyone knows whether the deal will happen. A sensible sequence keeps the cost proportionate.

1. Before exclusivity, do the cheap checks yourself. Filed accounts, charges registered at Companies House, the directors' history, online reviews, the state of the website and the phone manner, and a drive past the premises. A surprising number of deals end here.
2. Agree the heads of terms, including exclusivity, so the money about to be spent is not spent in competition. What belongs in that document is in heads of terms.
3. Scope the work to the risk. A business whose value is contracted recurring income needs the contracts examined properly. A business whose value is plant needs the plant inspected. Scoping every stream to the same depth wastes money on the streams that do not matter.
4. Run the streams in parallel, with one person holding the whole picture, because findings in one stream change the questions in another.
5. Report to the lender as you go. Not at the end.

What findings actually do to a deal

Most diligence produces findings. Very few of them should kill a transaction, and the useful skill is knowing which remedy fits which finding.

• A price reduction where the finding permanently changes what the business earns. A customer that has already given notice is not a risk, it is a fact, and the price should reflect it.
• An indemnity where a specific liability is identified and quantifiable, such as a known tax exposure or a live claim. The seller carries that one item.
• A retention or increased deferral where the risk is real but uncertain, such as whether customers stay. The mechanics are in deferred consideration and earn-outs.
• A condition of completion where something must be fixed first: a consent obtained, a lease extended, an accreditation transferred.
• Walking away where the finding goes to the reason for buying, or where the seller's answers stop being credible.

The findings that should slow you down

Some things are worse than they first appear. Records that cannot be produced, or that arrive very slowly, are the clearest signal in the process: a business that cannot evidence its own revenue by customer is telling you something about how it is run. Add-backs that recur every year are not one-offs. A customer list where the top few names dominate is a concentration problem regardless of the total. Staff turnover among the people who actually deliver the work matters more than turnover overall. An owner who cannot explain how prices are set is describing judgement that is about to leave. And any accreditation or approval attached to a named person is a question to resolve before exchange, not after.

Keeping it confidential

Diligence involves a lot of people asking a lot of questions, and in a small business that is noticed. Staff who work out that the business is being sold, from a stranger in the office counting vans, hear it in the worst possible way.

Most sellers want the process handled discreetly, and buyers should expect constraints: site visits outside working hours, customer conversations only with permission and often only at a late stage, and a small number of people told inside the seller's business. Those constraints are reasonable and they have to be planned around rather than argued with. They also affect the timetable, because a process that can only happen on Saturday mornings takes longer.

What goes wrong

The lender heard late. A finding that would have been handled comfortably in week two becomes a credit committee problem in week ten, and the terms move.

The scope was a template. Full-scope diligence on a small business is expensive and it examines the wrong things. Scope to the risk.

Nobody read the contracts for change of control. The clause that lets a major customer walk on a change of ownership is the single most valuable paragraph in the data room.

The buyer skipped the commercial stream. The accountants verified the numbers, the solicitors verified the paperwork, and nobody asked the customers whether they would stay.

Findings were stockpiled for a big renegotiation. Sellers respond badly to a long list produced late, and it reads as a strategy rather than a discovery. Raise things as they emerge.

What to have ready, and what happens next

Buyers who have their own paperwork ready before diligence starts finish faster, because the lender's questions arrive at the same time as the seller's answers. The general list, in the order a lender tends to ask for it, is our document checklist.

Once the findings are settled and the structure is fixed, the process moves to drawdown and the mechanics of the day itself, which are in completion.

What we know is this market and the specific people who fund acquisitions in it, which matters most exactly when diligence has changed the shape of a deal and the original funder has gone quiet. Tell us what has been found and how the structure has moved, and we come back to you having spoken to the right people.

We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.