Once the price is agreed in principle, the buyer examines the company in depth. It is the stage where most deals fall over or are repriced. Knowing what will be asked, and preparing early, protects the value negotiated.
The letter of intent is signed, the price is agreed in principle and the buyer has exclusivity. Due diligence begins: weeks in which the buyer’s accountants, lawyers and advisers request documents, ask questions and look for anything that could justify a lower price or extra protection. For the seller, it is the most tiring stage — and the most dangerous.
What will be reviewed
Financial
- Accounts for the last three to five years and the current year, with monthly management accounts.
- Reconciliation between reported and normalised EBITDA.
- Quality of earnings: recurring revenue, seasonality, margins by customer and product.
- Working capital: debtor and creditor days, inventories.
- Debt and debt-like items: loans, leases, guarantees, off-balance-sheet liabilities.
Tax
- Returns and payments for recent years; past or current inspections; known contingencies.
- Transfer pricing on related-party transactions.
Legal
- Articles, minutes, company register, shareholder structure.
- Key contracts with customers, suppliers, distributors and landlords — especially change-of-control clauses.
- Licences, intellectual property, litigation, data protection and sector compliance.
Employment
- Staff list, contracts, pay and benefits; contingencies such as unpaid overtime or misclassified contractors.
Operational and commercial
- Customer and supplier concentration, order book, condition of equipment, management team and founder dependence.
Where deals fall over
Due diligence rarely uncovers something the seller did not know. What happens is that the seller did not say, or did not see its importance. Typical problems: unprovided tax contingencies, a key customer with a change-of-control clause, property or licence irregularities, and an EBITDA that does not survive the buyer’s normalisation. A problem surfacing in due diligence always costs more than the same problem disclosed upfront, because it undermines the buyer’s trust in everything else.
How to prepare
- Run vendor due diligence before going to market, and fix what can be fixed.
- Disclose early what cannot be fixed. A contingency explained in the memorandum is negotiated; one discovered in due diligence is used against the seller.
- Build the data room before signing the LOI: complete, indexed, up to date.
- Appoint one person to answer questions. Questions left unanswered for days create suspicion.
- Keep the business performing. A dip in results during this stage is used to renegotiate.
What comes out of it
The buyer confirms the price, proposes adjustments or asks for contractual protection: specific indemnities, part of the price held in escrow, or warranties for identified risks. A well-prepared seller has room to negotiate these; a poorly prepared one accepts them with no alternative.
GestInvest prepares companies for sale, including vendor review and data room, and supports sellers through due diligence. Read more about the sale process and M&A and transactions.
Frequently asked questions
How long does due diligence take?
Between four and twelve weeks, depending on company size and the quality of available information.
Who pays for due diligence?
The buyer pays its advisers. Vendor due diligence, done beforehand, is paid by the seller and is usually recovered in the price.
What is a data room?
A repository, usually digital with controlled access, where the seller makes documents available to the buyer during due diligence.
