What Buyers Look for in Due Diligence. And How to Prepare for It

Due diligence is where deals either hold together or start to fall apart. If you go into it unprepared, you will face a combination of deal chip (the buyer reducing their offer), prolonged timelines, and. In the worst cases. A buyer walking away entirely. The good news is that most due diligence problems are foreseeable, and the vast majority can be addressed before you ever open a data room.

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What actually happens during due diligence?

Once Heads of Terms (HoTs) are signed and exclusivity begins, the buyer. Usually supported by an accountancy firm and a law firm. Will send you a due diligence request list. This is typically a document of 50–150 questions spanning financial, commercial, legal, and operational workstreams. You respond by uploading documents to a virtual data room. Their advisers review, ask follow-up questions, and produce reports for the buyer. The process typically runs for six to twelve weeks in a UK mid-market transaction.

The buyer is not looking to catch you out. They are trying to verify that what you told them during the sale process is true, and to quantify any risks that might affect the business post-completion. What they find will shape the final price, the structure of any deferred consideration, and the warranties and indemnities you are asked to give in the Sale and Purchase Agreement (SPA).

What do buyers scrutinise in financial due diligence?

Financial due diligence is almost always the most detailed workstream. A firm of accountants will be appointed by the buyer to produce a Quality of Earnings (QoE) report. Essentially a forensic review of what your EBITDA really looks like.

What they look for:

  • Three years of statutory accounts and monthly management accounts
  • EBITDA normalisation. Stripping out one-off costs and non-recurring income
  • Working capital profile: what level of working capital is genuinely needed to run the business?
  • Revenue concentration and trend: is growth real, organic, and repeatable?
  • Debtor days, creditor days, and any signs of cash flow manipulation ahead of sale
  • Director remuneration and owner benefits run through the business

Common red flags:

  • Management accounts that don't reconcile to statutory accounts
  • EBITDA add-backs that look aggressive or poorly evidenced
  • Revenue pulled forward or costs deferred to flatter the last 12 months
  • Unbudgeted cash drawings or personal expenses through the business

How to prepare: Get your management accounts in order at least 12–18 months before a sale process. Prepare a clean EBITDA bridge with properly evidenced add-backs. Have your accountant review the reconciliation between management and statutory accounts before the buyer's advisers do.

What does commercial due diligence cover?

Commercial due diligence asks whether the business is genuinely competitive and whether the revenue will continue after you leave. This is the workstream most sellers underestimate.

What they look for:

  • Customer concentration: what percentage of revenue comes from your top five customers?
  • Contract status: are key customer relationships underpinned by written contracts with reasonable notice periods?
  • Supplier dependency: are you reliant on one or two suppliers with no alternatives?
  • Market position and competitive landscape
  • Pipeline and order book. Especially important in construction, manufacturing, and recruitment

Common red flags:

  • One customer representing more than 25–30% of revenue with no long-term contract
  • Contracts that contain change-of-control clauses (which can void them on a sale)
  • Revenue that is heavily relationship-dependent and tied to you personally
  • Declining margins or market share with no clear explanation

How to prepare: Before going to market, review all major customer contracts and check for change-of-control provisions. If key relationships are built around you personally, start transitioning them to senior members of your team. If you don't have written contracts with your major customers, get them in place.

Legal due diligence is conducted by the buyer's solicitors. They are looking for anything that could create a liability after completion. Whether that is employment risk, property issues, intellectual property ownership, or outstanding litigation.

What they look for:

  • Employment contracts for all staff, particularly senior management
  • IP ownership. Is it clearly vested in the company, or is there ambiguity around work done by contractors?
  • Property: freehold title, lease terms, dilapidations obligations, break clauses
  • Any current or historic litigation, regulatory investigations, or HMRC enquiries
  • Confirmation of Companies House filings, correct share ownership, and corporate structure

Common red flags:

  • IP developed by a contractor with no written assignment agreement
  • A lease expiring within two to three years with no renewal agreed
  • Employment disputes, tribunal claims, or grievances not disclosed
  • Personal guarantees given by the company that weren't mentioned during the sale process
  • Shares held incorrectly or option schemes not properly documented

How to prepare: Commission a basic legal health check with a solicitor before you go to market. Get IP assignments in place for any historical contractor work. Review your property leases. Disclose any litigation or disputes early. Buyers are far more concerned when they discover something themselves than when you tell them upfront.

What does operational due diligence involve?

Operational due diligence looks at whether the business can actually function and grow without you. It becomes more detailed the more owner-dependent the business appears to be.

What they look for:

  • Management team depth and retention risk
  • Systems and processes: are they documented and scalable?
  • IT infrastructure and any legacy system dependencies
  • TUPE obligations if the transaction is structured as an asset sale
  • Key person risk. Especially relevant in professional services, healthcare services, and recruitment

Common red flags:

  • No management layer below the owner capable of running the business
  • Processes that exist only in the owner's head
  • High staff turnover or several key people leaving in the 12 months before sale
  • Outdated IT systems requiring significant near-term capital expenditure

How to prepare: Invest in your management team at least two to three years before sale. Document key processes. If you know certain systems need replacing, do it before sale rather than leaving it to a buyer to discover and price in.

How should you set up your data room?

A well-organised data room significantly speeds up due diligence and signals to a buyer that you are a well-run operation.

Typical data room structure:

SectionContents
CorporateCertificate of incorporation, Articles, shareholder register, Companies House filings
Financial3 years statutory accounts, management accounts, forecasts, EBITDA bridge
CommercialMajor customer and supplier contracts, order book, pipeline data
LegalEmployment contracts, property leases, IP assignments, litigation history
OperationalOrganogram, process documentation, IT summary, CAPEX schedule
People & HRSenior team CVs, remuneration schedules, pension arrangements
TaxCT returns, VAT returns, any HMRC correspondence or enquiries

How to prepare your data room in 7 steps:

  1. Appoint someone internally (or use your adviser) to own the data room process
  2. Build the structure before sending the buyer their request list
  3. Name documents clearly. Buyers' advisers will not search through poorly labelled files
  4. Upload documents in bulk at the start rather than drip-feeding, which signals disorganisation
  5. Log every question and response so there is a clear audit trail
  6. Review everything before it goes in. Do not upload documents you have not read
  7. Keep one person as the single point of contact for all buyer queries

How can due diligence chip or kill a deal?

It happens more than most sellers expect. The most common outcomes when due diligence finds problems are:

  • Price chip: The buyer reduces the headline price to reflect a risk they have identified. For example, a customer contract with a break clause, or an EBITDA add-back they will not accept
  • Deferred consideration restructure: More of the consideration moves to an earn-out, contingent on the risk not materialising
  • Warranty and indemnity demand: The buyer seeks a specific indemnity in the SPA, creating a post-completion liability for you
  • Deal collapse: Rare, but it happens. Most often when the financials look materially different from what was presented, or when a major undisclosed liability surfaces

The single most effective thing you can do is prepare thoroughly before going to market, not after. Buyers are far more likely to accept a disclosed risk with a proposed solution than to discover a problem themselves mid-process.

FAQ

How long does due diligence take in a UK business sale? For a mid-market transaction, expect six to twelve weeks for the main due diligence workstreams. Complex deals. Particularly those involving multiple sites, regulated activities, or foreign operations. Can run longer.

Can I negotiate what information I share in due diligence? You can. And should. Negotiate around commercially sensitive information, such as detailed customer lists, before exclusivity begins. A well-drafted NDA and a phased data room approach (releasing sensitive data later in the process) is standard practice.

What is a Quality of Earnings report? A Quality of Earnings (QoE) report is produced by the buyer's accountants to verify and restate your EBITDA. It tests your add-backs, reviews working capital, and assesses the sustainability of earnings. It typically forms the basis for any price renegotiation.

What happens if due diligence finds something I didn't disclose? It depends on the nature of the issue. Minor gaps are common and rarely fatal. Material issues. Particularly those that affect the financial picture you presented. Can lead to price chips, SPA amendments, or in serious cases, deal collapse. Disclose early; it is always better.

Do I need to provide three years of accounts? Yes, in almost every case. Buyers and their accountants will want to see a trend. Not just the most recent year. Monthly management accounts for the same period are equally important and often reviewed in as much detail as the statutory accounts.

What is a change-of-control clause and why does it matter? A change-of-control clause in a customer or supplier contract may allow the other party to terminate or renegotiate the agreement if ownership of your business changes. These need to be identified before sale, disclosed to the buyer, and. Ideally. Consented to or renegotiated before completion.

Find out what your business is worth before due diligence begins

The strongest position to be in when you enter a sale process is knowing your numbers before a buyer does. Use the free valuation calculator on the Succession Group website to get an indicative view of what your business might be worth. And what levers would move that figure before you go to market.

This article contains general information only and does not constitute financial or tax advice. Every business sale is different. Speak to a qualified UK tax adviser about your specific situation before making any decisions.