What a buyer will ask for, and how to have it ready

Due diligence is not an audit. It is a buyer trying to work out whether the business they are about to pay for is the one that was described to them, and whether anything in it will become their problem after completion.

Every question has a reason. Once you can see the reason, the list stops feeling like an interrogation and starts looking like a checklist, which is what it is.

1. Corporate records

What they want: certificate of incorporation, articles of association, the statutory registers, share certificates, minutes of board and shareholder meetings, details of any shareholders agreement, and confirmation of who owns what.

Why: they are checking that you can actually sell what you are offering to sell. A missing share transfer form from 2017, a shareholder nobody has spoken to in five years, or articles containing pre-emption rights that were never waived will all stop a deal, and all of them take weeks to unpick.

The one that catches people: unissued or wrongly issued share options. Somebody was promised 5 per cent verbally in 2019 and it was never documented. That conversation surfaces at the worst possible moment.

2. Financial information

What they want: three years of statutory accounts, monthly management accounts for the current and previous year, the current year budget and forecast with the assumptions behind it, an aged debtor and creditor listing, the bank facilities and any security, a fixed asset register, stock valuation and the policy behind it, and a full reconciliation of the adjusted profit figure you quoted.

Why: the accounts tell them what happened. The management accounts tell them what is happening. The gap between the two tells them how much your reporting can be relied on.

The one that catches people: management accounts that do not reconcile to the filed accounts. There is usually an innocent explanation, such as year end adjustments that never went back into the monthly ledgers. It still has to be explained, and explaining it in week five of due diligence is worse than explaining it in the information memorandum.

3. The adjusted profit bridge

This deserves its own heading because it is where most of the price is won or lost.

You will have quoted a figure for adjusted profit. The buyer's accountant will ask for every adjustment, in a schedule, with the evidence for each one. Owner's remuneration above a market rate for the role, genuinely personal costs run through the business, one off legal or professional fees, and non-recurring items are all ordinarily accepted.

What is not accepted is a real cost relabelled. If the business needs a van and the van is in the accounts, the van is not an add-back. Our guide to add-backs sets out which ones survive and which ones do not.

Prepare this schedule yourself, before anyone asks, with the supporting documents attached to each line. It is the most persuasive document in the pack.

4. Tax

What they want: corporation tax computations and returns for three years, VAT returns and any correspondence with HMRC, PAYE records, details of any enquiry, open or closed, any tax scheme the company has used, and confirmation of any outstanding liability.

Why: in a share sale the buyer inherits the company's tax history along with everything else. That is precisely why many buyers prefer an asset sale, and why a clean tax position is worth real money to a share seller.

The one that catches people: an HMRC enquiry that was resolved informally and never closed out in writing. If there is no letter, there is no evidence, and the buyer's advisers will treat it as open.

5. Property

What they want: the lease, in full, with every deed of variation and licence to assign or alter; the rent review history; the service charge accounts; the schedule of condition; any dilapidations correspondence; and the landlord's consent position on a change of control.

Why: the lease frequently decides whether the deal happens at all. A lease with two years unexpired, no security of tenure and a landlord who has not been approached is a serious problem for a buyer who is about to put their money into the fit out.

The one that catches people: a change of control clause. Many leases treat a share sale as requiring the landlord's consent even though the tenant entity has not changed. If your landlord has to approve the buyer, find that out in month one, because landlord consent can take three months on its own.

6. Employment

What they want: an anonymised employee schedule with role, start date, salary, hours, holiday entitlement and notice period; contracts of employment and the staff handbook; details of any pension scheme and its funding; any current or threatened dispute, grievance or tribunal claim; and confirmation of right to work checks.

Why: employees transfer automatically under TUPE on a business transfer, with their terms and their continuity of service intact. The buyer is inheriting your employment history whether they like it or not, so they need to know what is in it.

The one that catches people: long service. An employee with eighteen years of continuous service carries a statutory redundancy entitlement and an unfair dismissal risk that a buyer will want to quantify. It is not a reason not to buy. It is a reason to know the number.

7. Contracts and customers

What they want: the material customer and supplier contracts, the standard terms of business, the revenue split by customer for three years, details of any exclusivity or minimum volume commitment, and any contract containing a change of control provision.

Why: two questions. How concentrated is the revenue, and does any of it walk away when you sell?

The one that catches people: change of control clauses in customer contracts. A clause letting your largest customer terminate on a change of ownership converts your best asset into your biggest risk, and the buyer will discover it. Better that you discover it first and either get a waiver or price for it.

On concentration: a customer worth 40 per cent of revenue is not fatal, but it is the question. Have the answer ready: how long they have been a customer, how many people at their end value the relationship, whether it is contracted, and what has happened when they have been tendered before.

8. Legal, compliance and insurance

What they want: any litigation, current or threatened, or concluded in the last three years; licences and permits and their renewal dates; regulatory correspondence; intellectual property, including the trade mark register position and who owns the domain name; product liability history; and the insurance schedule and claims record.

The one that catches people: ownership of the domain and the social accounts. A remarkable number of small businesses have their primary domain registered to a former web developer's personal account. It is fixable, and it is far cheaper to fix before a buyer finds it.

9. IT and data protection

What they want: the systems in use and the licences for them, the hosting arrangements, the backup and disaster recovery position, any data processing agreements, the privacy notice, and the record of processing activities required under UK GDPR.

Why: this section has grown considerably in the last few years and is now standard even for small businesses. A buyer taking on a customer database is taking on the compliance obligations attached to it.

The pack, as a list

| Area | Items | Sensitivity | | --- | --- | --- | | Corporate | Incorporation, articles, registers, share history | Low | | Financial | 3 years accounts, management accounts, forecast, debtors | Medium | | Adjusted profit | Line by line schedule with evidence | Medium | | Tax | CT and VAT returns, HMRC correspondence | Medium | | Property | Lease in full, consents, dilapidations | Medium | | Employment | Anonymised schedule, contracts, disputes | High | | Contracts | Material contracts, revenue concentration | High | | Legal | Litigation, licences, IP, insurance | Medium | | IT and data | Systems, hosting, UK GDPR position | Low |

Sensitivity is about staging, not about hiding. High sensitivity items are released later and often only to advisers.

What to do with all of this

Put it in one place, indexed, before you go to market. A structured data room with folders that match the list above, where a buyer's adviser can find the lease without emailing you, does three things at once: it speeds the deal up, it signals competence, and it produces an audit trail of who looked at what and when.

That last point matters more than it sounds. If a dispute arises later about what the buyer knew, a record showing their adviser opened the schedule of dilapidations on a specific date is the answer to it.

And the part that is not about documents

Be available. Deals lose momentum in the gaps, and momentum is most of what gets a small business sale over the line. A seller who takes a fortnight to come back to a question has, without meaning to, told the buyer they are not the priority. Some buyers will conclude they should not be either.