Due diligence when you're selling a business

Due diligence is the process by which the buyer checks that your business is what you’ve said it is. As the seller you’re on the receiving end, which means a long list of questions arrives, most of them asking for documents, and how well you answer them can affect whether you end up with the price you agreed.

This page is about the seller’s side of due diligence, where I help you answer the buyer’s enquiries, keep the data room in order and make sure that what you’ve told the buyer is properly recorded in the disclosure letter.

What the buyer’s solicitor will ask for

There are three types of due diligence. Commercial due diligence is the buyer satisfying itself that the business is a good one. Financial due diligence is done by the buyer’s accountants and includes the tax side, which they deal with along with your own accountant. Legal due diligence is done by the buyer’s solicitor, and it’s the part I deal with.

The legal questionnaire covers much the same ground on almost every deal. It starts with the company and who owns it, so the statutory books, the share capital and any shareholders’ agreement, and then moves on to the contracts with your main customers and suppliers, and in particular whether any of them can be ended if the company changes hands. It also covers the people, which means employment contracts, restrictive covenants, anyone treated as self-employed and any grievances or claims.

After that come the premises and the lease, the intellectual property (who created it and whether the company actually owns it), any licences or regulatory permissions the business needs, data protection, insurance, and any disputes, current or threatened. My due diligence questionnaire is free to download and gives a good idea of what to expect, and there’s a simpler explanation in what is due diligence when selling a business?

Who does what

You, or someone you trust in the business, will need to find the documents and upload them to the data room, as you’re the ones who know where they are. I give you a structure to follow and a list of what’s needed, and then I review what goes in and settle the written replies before the buyer sees them.

That review matters because a reply which is slightly careless can turn into a warranty claim two years later, and a document uploaded without any explanation can lead to further questions. Sometimes a short answer is the right one, and sometimes a problem needs explaining properly, along with what you’ve done about it, so that the buyer can see it has been dealt with.

If you’d prefer to hand over the whole job, I can populate the data room for you, but that takes a lot of hours and is priced separately. It’s usually cheaper and quicker for owners to do the uploading themselves.

How due diligence feeds into the sale agreement

What you say in due diligence feeds directly into the sale agreement, whether that’s a share purchase agreement or an asset purchase agreement. If a key customer contract is about to expire, the buyer may want a price reduction or part of the price held back. If HMRC has opened an enquiry you can expect to be asked for an indemnity, and if an employee has raised a grievance the buyer will want to understand what it might cost.

It also feeds into the disclosure letter, which is the document that protects you. The warranties in the sale agreement say that the business has no problems and the disclosure letter lists the ones it does have, and a buyer generally can’t claim later for something which was fairly disclosed. Telling the buyer something in a data room reply is not automatically the same as disclosing it, though, and I’ve written about a case on that in get your disclosures right. Part of my job is knowing which issues will worry a buyer, which can be dealt with in the agreement and which are simply a normal part of running a business.

Preparing in advance

Due diligence is much easier for sellers who have prepared before the questionnaire arrives. If your sale is a year or more away, an exit readiness review goes through the business in the way a buyer’s solicitor would, so that any gaps can be fixed in your own time. Even a few weeks’ head start on gathering documents makes a difference once the exclusivity period is running.

Full due diligence reports

I can produce a full legal due diligence report on a business, of the kind a buyer’s solicitor would write for their client, if that’s required. For most owner-managed deals it’s more than is needed, as it costs more and is often disproportionate to the price, and a shorter note of the issues that matter is usually enough. If you do need the full report, let me know and I’ll quote for it.

How long it takes and what it costs

On a sale which takes two to three months, due diligence runs for most of the middle part, alongside the first drafts of the sale agreement. How long it takes depends largely on how quickly the documents can be found, which is another reason to prepare early.

Reviewing your replies and dealing with the buyer’s enquiries is normally part of my fixed fee for the sale as a whole. Every quote is specific to the deal, but as a guide my fee will be between 0.5% and 5% of the deal value. Under £1m it’s usually 3% to 5% and over £1m it’s usually 1% to 2%, although it does depend on the business, the price and the commercial terms. The minimum fee is £3,500 plus VAT, and on lower value deals I can quote for a reduced, more standardised service. If you want help with due diligence on its own, I’ll quote a fixed fee once I’ve seen what’s involved.

Next steps

If you’re selling and want help with due diligence, get in touch and let me know where the sale has got to, and send me the heads of terms and the buyer’s questionnaire if it has arrived.