An analyst at The Exit Advisor assessing a companies balance sheet as part of the due diligence process

What is Due Diligence?

09/07/2025

What is Due Diligence?

Due diligence is a critical process undertaken before buying or selling a business. In simple terms, it means doing your homework – deeply analysing every part of a company to confirm its true value, risks, and operational realities before committing to a deal. Whether you’re purchasing a business valued at £1m or £10m, due diligence ensures you don’t end up with nasty surprises after completion.

When buying a business, due diligence validates the seller’s claims. It covers finances, legal matters, commercial contracts, HR, intellectual property, compliance, and operational processes. For sellers, it prepares them to address buyer concerns confidently, smoothens negotiations, and increases deal certainty.

Here are three key things to look out for during due diligence:

  1. Financial Integrity
    Analyse financial statements in detail. Are revenues and profits consistent with management’s claims? Look out for hidden debts, unusual one-off income items, or aggressive accounting practices that artificially inflate profitability. Get clarity on working capital requirements to avoid unexpected cash flow gaps post-acquisition.

  2. Legal and Compliance Risks
    Scrutinise all contracts, licences, employment agreements, leases, and any ongoing litigation or disputes. Many deals fail or renegotiate on discovering non-compliance issues such as unpaid taxes, expired licences, or employee misclassification, all of which can trigger fines or operational restrictions down the line.

  3. Operational and Commercial Viability
    Beyond finances, assess the true operational health of the business. Who are the key customers and suppliers? How dependent is revenue on the owner’s personal relationships? Are there operational bottlenecks or outdated systems requiring urgent investment? Understanding these ensures the business is not just profitable on paper but sustainable in reality.

Ultimately, due diligence isn’t about finding reasons to walk away; it’s about understanding exactly what you are buying so you can negotiate fairly and plan confidently for integration and growth. For sellers, robust preparation for this scrutiny builds credibility and increases buyer trust, often resulting in better valuations and faster completions.

If you’re considering buying or selling a business, our team can guide you through the due diligence process with precision, discretion, and clarity.

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The Exit Advisor - What is Due Diligence?

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