Before anyone buys a business, they check it over properly. Think of it like having a car inspected before you hand over the money.
This process is called due diligence. In this post, we’ll explain what it involves, why it often feels so invasive, and what makes some businesses sail through it. We’ll also show how a “practice run” with your own accountant can save you time, money and stress.
What Is Due Diligence?
Due diligence is the detailed investigation a buyer carries out before completing a purchase. Their accountants, lawyers and sometimes specialist consultants go through your finances, contracts, staff arrangements and systems. Their goal is simple: they want to make sure the business is exactly what it appears to be.
Throughout the sales process, you and your advisers will have presented the business in its best light. Due diligence tests that presentation against the evidence. In other words, the buyer wants proof, not promises.
Most buyers will not skip this step. Even a friendly buyer who trusts you completely, such as a long-standing manager, will still have lenders, investors or advisers who insist on checking.
What Do Buyers Actually Look At?
The scope varies from deal to deal. However, most investigations cover several core areas.
Financial due diligence. The buyer’s accountants examine your accounts, management figures, cash flow and forecasts. They check whether the profit you reported is real and sustainable. They also look at your debts, your tax position and the quality of your earnings.
Legal due diligence. The buyer’s lawyers review your contracts with customers and suppliers. They also check your property leases, intellectual property, licences and any disputes. Above all, they want to know that you own what you say you own.
Commercial due diligence. Here the buyer looks at your market, your competitors and your customers. They want to understand how secure your income is and where future growth will come from.
People and employment. Buyers review employment contracts, pay arrangements, pension obligations and key staff. They also ask how much the business depends on you personally.
Systems and operations. Specialists may examine your technology, data protection, health and safety, and day-to-day processes. A weakness here can reduce the value or create costs after the sale.
Why It Can Feel So Invasive
If you’ve never been through due diligence before, it can come as a shock. Strangers ask detailed questions about every corner of the business you’ve spent years building. Requests for documents arrive in long lists, and new questions follow each answer.
The process also takes time. It typically runs for weeks rather than days, and it often lands on top of your normal workload. Meanwhile, you still have a business to run, staff to manage and customers to serve.
Many owners also feel personally scrutinised. A buyer’s question about a missing contract can sound like an accusation, even when it isn’t one. Consequently, tensions can rise, and some deals stall or collapse during this phase.
Knowing what to expect makes it far easier to handle. Better still, preparing in advance can remove most of the pain.
What Smooth Deals Have in Common
Some businesses get through due diligence with far less friction than others. What do they share?
They have effectively done it to themselves first. Before any buyer appeared, they ran a “practice run” with their own accountant. That adviser looked at the business the way a stranger would, with no assumptions and no sentimental attachment.
This approach works for a simple reason. A buyer’s team asks the same questions in much the same way, whichever business they examine. If you’ve already answered those questions privately, little can surprise you in public.
What a Practice Run Usually Uncovers
A pre-sale review tends to surface the same issues a buyer would find. Some of the most common include the following.
Messy paperwork
Records that made sense to you for years can look chaotic to an outsider. Missing invoices, unfiled documents and inconsistent records all raise questions. Even when nothing is actually wrong, disorder makes a buyer wonder what else might be hiding.
Undocumented related-party arrangements
Owner-managed businesses often have informal links with other people or companies connected to the owner. For example, the company might rent a building from you personally, or buy services from a relative. If nobody has written these arrangements down, buyers will ask why, and they may question whether the terms were fair.
Contracts that were never signed properly
A handshake deal or an unsigned agreement may have worked fine for years. To a buyer, however, it creates uncertainty. A customer relationship without a valid contract offers no guarantee that the income will continue after you leave.
Inconsistent figures
Different sets of numbers sometimes tell different stories. The management accounts may not match the statutory accounts, or the tax returns may not match either. Buyers notice these gaps quickly, so it’s better to understand and explain them yourself first.
Dependence on the owner
If customers, suppliers and staff all rely on you personally, buyers will see that as a risk. A practice run shows you how much of the value sits in you rather than in the business.
Tax and compliance gaps
Small errors in tax, payroll or regulation can grow into large concerns during a sale. Finding them early lets you correct them on your own terms.
Fixing Problems in Private
Timing is the real advantage of a practice run. When you review the business months before any buyer gets involved, you have time to fix what you find.
You can tidy up the paperwork at a steady pace, and you can sign off agreements that were never finalised. Where related-party arrangements exist, you can document them properly. If a figure looks odd, you can investigate it calmly and prepare a clear explanation.
Compare that with discovering the same problems during a live deal. Now the buyer sees the issue first, and you must explain it under pressure. Moreover, the buyer may use the problem to lower the price or demand extra protection in the contract. Worst of all, a problem you hid, or simply missed, can damage trust and put the whole sale at risk.
In short, the same problem costs far less to fix in private than to justify in the middle of a negotiation.
The Benefits of Doing It to Yourself First
A practice run offers several advantages beyond avoiding bad surprises.
- A stronger negotiating position. When you know your own weaknesses, buyers have fewer chances to use them against you.
- A smoother, faster process. Prepared answers and organised documents mean fewer delays during the buyer’s investigation.
- Greater confidence. Owners who understand their own business tend to negotiate more calmly.
- A better price. Buyers pay more for businesses they trust, and they trust well-prepared ones.
- Less stress. Surprises cause most of the pain, so removing them makes the whole process easier to bear.
- A chance to improve the business. Many problems you uncover are worth fixing even if you never sell.
How to Run Your Own Due Diligence
You can start the process without waiting for a buyer. A sensible approach might look like this.
- Choose the right adviser. Pick an accountant who understands sales and can look at the business objectively.
- Set the scope. Decide which areas to review, covering finance, legal, people and systems.
- Gather the key documents. Collect your accounts, contracts, employment agreements, leases and licences in one place.
- Look at the business like a stranger. Ask what an outsider would question, and where the paperwork falls short.
- List the issues. Write down every gap, inconsistency and weak spot, ranked by importance.
- Fix what you can. Start with the most serious problems, and work down the list.
- Prepare clear explanations. For anything you can’t change, write a straightforward account of what happened and why.
- Build a data room. Organise your documents so a buyer can find what they need quickly.
Ideally, you should begin months before you plan to sell. Some fixes take time, and others depend on third parties, so an early start gives you room to manoeuvre.
When to Start
Many owners wait until they’ve agreed terms with a buyer before they think about due diligence. Unfortunately, by that point it’s too late for a quiet clean-up. The clock is already running, and the buyer is already looking.
A better time is long before you decide to sell. If you’re even considering an exit within the next few years, a practice run can help you plan with confidence. And because the review often improves how the business operates, it rarely goes to waste.
The Bottom Line
The best way to survive due diligence is to have already done it to yourself. It’s far cheaper to fix a problem in private than to justify it mid-negotiation.
How H&Hendricks Can Help
Running your own due diligence before a buyer does is a core part of H&Hendricks’ Preparing for Sale service. It’s a dry run with people on your side, not theirs. If a sale is even a possibility in your future, starting that conversation early gives you the time to put things right quietly.
Ashley Bancroft is a founding Partner of H&Hendricks. A qualified Chartered Accountant and specialises in finance, strategy and entrepreneurship, with particular focus on value creation.
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