News & Views

A Pre-Sale Due Diligence Checklist

Before approaching potential buyers, you need to ask a critical question: is your business genuinely ready to be sold? If it isn't, the due diligence process will quickly expose the cracks. Issues uncovered through these investigations can deter buyers and delay the transaction, reduce the value of your business, and result in harsh indemnities.

For that reason, it’s wise to undertake a form of ‘reverse due diligence’ on your own business before going to market. A buyer is not simply purchasing the current business, they are buying its future prospects, risks, and operations – they will want to see a ‘tidy house’.

This short read summarises the key areas a buyer is likely to examine during the due diligence process so you can assess your business from their perspective. This way, you can identify vulnerabilities early, address gaps in documentation or compliance, and present a more attractive acquisition opportunity.

Corporate and Regulatory Compliance

The buyer’s advisors will first ensure your internal governance and compliance records are in order and the business is compliant. Depending on the requirements of your business, some of the records to think about are:

• Companies House filings and statutory registers.
• Anti-money laundering compliance procedures.
• Accounts and management reports (typically for at least the last six years).
• Corporation tax and VAT filings (and evidence of general HMRC compliance).
• Data protection, bribery and corruption policies.
• Health and safety systems and procedures.
• Asset registers and proof of intellectual property ownership.
• Industry-specific regulatory compliance procedures, such as COLP/COFA arrangements for law firms.

Buyers will also want to see details of any past regulatory investigations or breaches, and disclosure of any outstanding or threatened disputes (whether these are contractual, employment-related, or otherwise). These should, where possible, be fully addressed or actively being dealt with before discussions begin.

Company Contracts and Liabilities

Buyers will also look at the company’s commercial ties, as the value of the business is derived from these relationships and agreements. Ensure any arrangements are documented and readily accessible, including, but not limited to:

• Customer and supplier contracts (be aware of any ‘change in control’ clauses within these contracts that may trigger a termination of the contract on a sale of the business).
• Finance and banking documents.
• Details of any property owned or occupied by the business.
• Licensing arrangements.
• Insurance policies and claims histories.

Operational Considerations

Your operational infrastructure will play a huge part in how your business is valued. A business that runs smoothly on its own is much lower risk, which can have a positive impact on the valuation multiple. Be prepared for potential buyers to consider:

• Cash flow stability: Is your income predictable and recurring or are there ‘one-off’ projects that disrupt stability?
• Customer base: Is it diversified, or are you over-reliant on one or two major customers?
• Owner dependency: Are your processes documented, or does the business only function because certain key individuals are present? A buyer wants a business that survives your exit.

External Factors and Timing

Internal readiness is only part of the equation; external conditions will dictate who the potential buyers are, and how much they are willing to pay. Things to consider are:

• Market conditions: Current market health, industry consolidation trends, and the availability of financing for buyers.
• Timing: Whether your business is peaking, or if it has hit a natural ceiling that requires a buyer's larger resources to grow.
• Buyer targeting: How you position the business depends heavily on who is buying. Buyers in your industry (i.e., competitors) may pay a premium because they can combine your business with theirs to save on overheads. Whereas investors (i.e., private equity firms) may look more for an independent business that runs itself with a solid management team already in place.

Final Thoughts

Ultimately, the objective is to determine whether, both internally and externally, the business is in the strongest possible position to attract buyers (or investors).Top of Form By conducting an internal audit now, you can identify any areas of risk and improvement and work on such areas, in order to present your business in the best light, and command the best price.

For further information, please email Molly Davies or call 0151 906 1000.