By the time due diligence starts, both sides have already agreed a price — based on a story. The accounts say this, the customers are loyal, the pipeline looks like that. Due diligence is simply the buyer checking that the story is true before the money moves. We've sat on the buy side of that process more than 30 times, so here is what's actually going on behind the document requests — and what it means for you, whichever side of the table you're on.
The short version
- Every checklist item serves one of three questions: is the profit real, will it continue, and what exactly is the buyer inheriting?
- Arguments in diligence are rarely about the multiple — they're about the earnings.
- Deals don't usually die because of what was found, but because of when it was found. Disclose first, answer fast.
The three questions behind every checklist
Diligence checklists run to hundreds of items, but almost every one of them serves one of three questions. Is the profit real? — does it reflect genuine, repeatable trading, or is it propped up by one-offs and accounting choices? Will it continue? — once the current owner leaves, do the customers, the people and the income stay? And what am I inheriting? — contracts, people, liabilities, habits; everything transfers, including the things nobody mentioned. Understand that, and the whole process stops feeling like an interrogation and starts making sense.
Quality of earnings, in plain English
The heart of financial due diligence is taking the reported profit apart to see what's repeatable. One-off windfalls come out. Revenue that's been invoiced but not yet earned gets moved to where it belongs. Costs the owner ran through the business — or kept out of it — get corrected, including paying yourself less than your replacement would cost. What's left is the buyer's view of sustainable profit, and it's usually different from the number in the accounts. Because the price is a multiple of that profit, every pound that moves here moves the price by several pounds. This is why arguments in diligence are rarely about the multiple — they're about the earnings.
The tax questions that surface
A handful of tax issues come up over and over in businesses of this size. None of them has to kill a deal — found early and disclosed, they're manageable. Found late by the buyer's team, they turn into price reductions or clawback clauses, and they damage trust at exactly the wrong moment:
- VAT treatment applied incorrectly on certain sales — often for years, which means the exposure has been quietly compounding.
- Contractor status. Contractors engaged for years who look a lot like employees. The back-taxes question lands on the buyer after completion.
- Director loan accounts that have drifted without being cleared or properly documented — a small thing that takes time to unwind mid-deal.
- Optimistic R&D claims. Research-and-development tax credits claimed more generously than the rules allow. Buyers now check these as a matter of course.
The questions a spreadsheet can't answer
The numbers tell you what happened. They don't tell you who the customers actually have the relationship with, which two or three employees the business would struggle without, or what genuinely happens on the first Monday after the owner leaves. We pay so much attention to this because we've lived the answer: integration — keeping the people, the clients and the culture intact after completion — is where acquisitions succeed or fail. Good buyers probe these questions hard. Smart sellers have answers ready.
Most deals don't die because of what was found. They die because of when it was found.
Where deals get into trouble
Deals have momentum, and diligence is where momentum goes to die if the process is handled badly. A surprise that emerges in week six hits far harder than the same fact disclosed in week one, because the buyer starts wondering what else hasn't been mentioned. Slow, patchy responses to information requests do similar damage — buyers read disorganised paperwork as a sign of a disorganised business, fairly or not. And every unresolved issue that lingers becomes a bargaining chip when the final terms are negotiated.
If you're the seller
You can take most of the pain out of diligence before the buyer ever arrives. Get your documents — accounts, contracts, leases, payroll, tax filings — organised in one place early, and make sure the numbers in them agree with each other. Most importantly, disclose problems yourself, first, with context.
The rule worth remembering: a problem you raise is a fact to be managed. A problem the buyer discovers is a reason to re-price the deal. Then answer quickly once the questions start — speed signals confidence, and confidence keeps the price where it was agreed.
How we work
Whether we're acting for a buyer or helping a seller prepare, we run diligence the way we run it for our own acquisitions: difficult questions asked early, findings ranked by what actually affects the price and the risk, and conclusions in plain English rather than a 90-page report that buries the three things that matter. If you're heading into a transaction in either direction, talk to us before the process starts — that's when advice is cheapest.