Due Diligence: How Deals Get Picked Apart, and How to Stop It
Exit Planning

Most owners think the price is agreed at heads of terms. It is not. The price is agreed at completion, and everything that happens in between is a negotiation. Due diligence is that negotiation, and it is usually conducted between a buyer who has done this thirty times and a seller who is doing it once.

That asymmetry is the whole problem. It is also fixable, but not in the six weeks after an offer lands.

What due diligence actually is

Diligence is not one process. It is three, running at the same time, usually with three different teams asking overlapping questions on a deadline.

Financial diligence looks at whether your profit is real and repeatable. Legal diligence looks at whether you own what you say you own and whether anything in your contracts breaks when the shares change hands. Commercial diligence looks at whether your revenue survives the sale.

Each team produces a report. Each report gives the buyer a reason to move the price, adjust the structure, or ask for an indemnity. None of them produce a reason to pay you more.

The data room is your first impression

Before anyone reads a single number, they will form a view from how the information arrives.

Organise by function rather than chronology: corporate, financial, legal, HR, commercial, IT. Every contract signed and dated. Board minutes that exist and are complete. Employment contracts that match the people actually working there. Share register that reconciles to Companies House.

None of that is difficult. Almost none of it is done in advance.

A disorganised data room does not just slow the process. It tells an experienced buyer that the business is run the same way, which changes what they look for and how hard they look. It is the cheapest signal you will ever send, and most sellers get it wrong.

Quality of earnings, in plain English

Almost every buyer of any size will commission a quality of earnings report. Its job is to work out what the business really earns, stripped of things that will not continue after you leave.

That process is called normalisation, and it cuts both ways. Your car, an above-market or below-market director's salary, one-off legal fees, a bad debt that will not recur, rent paid to a property you own personally: all of it gets adjusted to arrive at a maintainable figure.

Here is the part that costs money. Adjustments that increase profit need evidence. Adjustments that reduce it do not, because the buyer's adviser is the one proposing them. If you cannot evidence an add-back, it does not happen.

The leverage is arithmetic. On a business valued at six times EBITDA, an adjustment of £100,000 moves the price by £600,000. Sellers routinely spend weeks arguing over a £30,000 line in the sale agreement while a £100,000 add-back falls away because nobody kept the paperwork.

If your monthly management accounts already separate one-off items from trading, most of this argument is over before it starts.

Working capital is where sellers lose the most

This is the mechanism that costs owner-managed sellers the most money and the one they understand the least when they walk in.

Most deals are done on a cash-free, debt-free basis. You keep the cash, you clear the debt, and the buyer takes the business with a normal amount of working capital in it. Normal is defined by a target, usually an average of the last twelve months, and if you deliver less than the target at completion, the difference comes off your proceeds pound for pound.

Two things follow. First, the target is negotiable, and it is negotiated using your own historic numbers, which means whoever understands those numbers better wins. Second, the twelve months before completion are the twelve months that set the average, so how you manage debtors, creditors and stock during that period directly changes the target you will be measured against.

Sellers who discover this at completion lose six figures without ever seeing where it went.

Commercial diligence: does the revenue survive you

Three questions do most of the damage.

Customer concentration. If one client is twenty per cent of revenue, the buyer is not buying your business, they are buying that relationship, and they will price the risk that it walks. Expect it to be structured into an earn-out rather than paid up front.

Churn. Not the rate, the reason. A buyer who cannot explain why customers leave assumes the worst.

Change of control. Read your customer and supplier contracts before a buyer does. Clauses that let a counterparty terminate on a change of ownership are common, easily missed, and hand that counterparty a veto over your deal. Some can be renegotiated quietly, over a year, in the normal course of business. None can be renegotiated quietly in week three of diligence.

The part nobody warns you about

Diligence runs for eight to sixteen weeks. During it you will answer several hundred questions, many of them repeats, while continuing to run the business that is being valued on its current trading.

If trading dips during diligence, and it often does, because the person who drives the business is now spending three days a week in a data room, the buyer sees a business whose numbers are softening at precisely the moment they are deciding what to pay. Deal fatigue is real, and it does not affect both sides equally. The buyer has a team. You have a day job.

What to do twelve months out

None of the above is fixable at speed, which is the point.

Get monthly management accounts that separate trading from one-offs, so add-backs are evidenced as they arise rather than reconstructed under pressure. Build the data room while nothing is happening, and keep it current. Read your top twenty contracts for change of control and assignment clauses. Understand your own working capital cycle well enough to argue about the target. Reduce the concentration you can reduce, and be ready to explain the concentration you cannot.

Then, when an offer arrives, diligence becomes what it should be: a confirmation of the price, rather than an opportunity to reduce it.

If a transaction is somewhere in the next one to three years, exit planning is the work that happens before any of this starts. It is considerably cheaper than the alternative.