Would your business survive a buyer’s due diligence?

You’ve poured blood, sweat and tears into building your business, and you’re now ready to hand ownership to someone else. You agree a price, shake hands – and then due diligence on your business starts. This is where deals are either made or broken. Not because the buyer is being difficult, but because every skeleton, shortcut or “we’ll sort it out eventually” comes out of the cupboard all at once.

Due diligence is the part of a sale that sellers often underestimate. It’s also where the gap between the price you expect for your business and the price you will actually receive, starts to form.

At Furley Page, our Corporate and Commercial team provides expert advice and assistance to businesses on both the sell-side and buy-side as they prepare for, negotiate and complete a sale. We’ve seen which issues genuinely move the price, which ones simply slow a deal down, and most importantly, how identifying these issues early lets our sell-side clients stay ahead of the curve.

Here are some key things to consider if you’re planning to sell your business.

The offer you received probably isn’t the price you’ll be paid

Most buyers make an offer based on a headline set of numbers: turnover, EBITDA (earnings before interest, taxes, depreciation, and amortization), growth trajectory. But that price is for the most part provisional. What follows is weeks, sometimes months, of a buyer’s lawyers and accountants finding every reason to argue why your business is worth less, or riskier, than the number suggested.

Every issue they identify becomes one of three things: a price chip (a straight reduction to the purchase price), a retention or escrow (part of your money is held back, sometimes for years), or a warranty and indemnity claim waiting to happen (a promise you made about the state of the business that can be called in against you personally after you’ve sold it, sometimes well after you’ve spend the proceeds of the sale).

None of this is theoretical. It is why sellers often walk away with less than they originally expected. It’s also why we encourage our clients who are thinking about selling their business to treat legal preparation as part of protecting value – not as a box-ticking exercise that only starts once the heads of terms (also known as letters of intent or memoranda of understanding) are signed.

What can erode the value of your business?

Incomplete or disorganised company books and records

Old share issues that were never properly documented. A former co-founder who left five years ago but is still technically a shareholder. A share buyback that was never formalised. These are exactly the kind of issues buyers look out for and capitalise on. Buyers find them alarming because they raise a fundamental question: who actually has the right to sell the shares in the company? These issues give rise to delay, further legal costs, and most importantly, something a seller should never be hearing for the first time from the buyer’s lawyers during the due diligence process.

Our corporate team can run a full health check ahead of a sale process – identifying gaps, tracing historic allotments and transfers, tidying statutory registers, and resolving legacy shareholder issues on your terms, long before a buyer’s lawyers can use them to argue your business is worth less.

Customer and supplier contracts

Change of control clauses are silent deal-killers. If your biggest customer or supplier contract lets the other side terminate the moment ownership changes hands, a buyer isn’t just noting a risk, there’re pricing in the possibility that your most valuable relationships walk away the day after completion. If a large share of your revenue sits with two or three contracts that could be terminated under a change of control clause, expect that to be a key reason for the buyer to argue why the price should be pushed down.

Reviewing existing key contracts for change of control, exclusivity and termination risk is one of the first things our team does to prepare clients for an exit. This is because it’s far easier to renegotiate a clause with a customer or trusted supplier than to explain the risk to a buyer mid-deal.

Employee risks

The senior hire without a written contract. The employee working remotely from another country. The freelance contractor who, in practice, works like an employee. The disciplinary issue that was handled informally a couple of years ago. None of this feels urgent when you’re running the business day to day, but it resurfaces as a liability the moment someone else is about to inherit it. More often than not, buyers will either discount for it or ask you to indemnify against these risks.

Our Employment team works alongside our corporate lawyers from the outset, identifying and resolving material employment issues, mitigating any potential tax-employment related issues, TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006) and status risks before they are identified by the buyer’s lawyers.

Are you really protecting personal data?

Accurate personal data management is a key element of your business that should not be overlooked. A privacy policy that’s more theoretical than actually implemented. Customer data being processed without a lawful basis. No process of how a data breach would actually be handled if it happened tomorrow. Or data processing outsourced overseas without the proper safeguards in place are some of the key legal and financial risks that buyer’s lawyers will seek to mitigate as part of their due diligence exercise.

Disputes

The customer complaint that’s gone quiet but never resolved. The disgruntled employee who left and made noises about a claim. The supplier dispute over a delivery five years ago that was “informally sorted” are some of the issues that a buyer’s lawyer will pick up on as part of their due diligence exercise. They will expect a full litigation and disputes history spanning several years as buyers treat disputes as a genuine financial and legal risks, because there’re the ones who inherit the liability the moment they acquire the business.

Blurred lines between the owner’s personal finances and the business

Family members on the company’s payroll who don’t really work in the business. Personal expenses run through the company. A property owned personally but used rent-free by the business. Loans to a director that are interest-free, unsecured, and struck on terms no arm’s length lender would ever offer. Individually, each of these might have started out as a reasonable, well-intentioned decision, but collectively, they blur the line between a director’s fiduciary duties to act in the best interests of the company and its own personal interests.

The problem isn’t that these arrangements are necessarily improper. It’s that they make it harder for a buyer to trust the numbers there’re being shown. If personal and business finances have been treated interchangeably for years, a buyer can no longer be certain the company accounts are accurate. Once the doubt creeps in, the buyer’s confidence in the business is likely to be eroded, and this may be reflected in the price there’re willing to pay.

Why should you get ready

The sellers who get the best deals don’t run risk-free businesses. Almost every business has some element of financial and legal risks. What sets them apart is that they found their own skeletons before a buyer did, and dealt with them on their own terms, rather than under pressure at the negotiating table.

That means starting the groundwork 12 to 24 months before you intend to go to market, not when the of terms are signed. It means undertaking a legal and commercial health check on your business to identify and eliminate the key issues that would erode the value of your business.

Just as importantly, it means bringing your advisers in early enough that, by the time you’re ready to sell, they already know your business inside out – the history behind that old shareholder arrangement, the context for a related-party loan or the reason a key contract was drafted in that way. That familiarity turns into speed and confidence once the sale process actually starts as your advisers are not struggling to understand your business for the first time while the buyer’s lawyers are already picking it apart like vultures. Instead, you have an established and versatile team, already fluent in the detail, ready to guide you through heads of terms, due diligence, disclosure, negotiation of the share purchase agreement, and on to completion.

The uncomfortable truth is that most owners are unprepared and only discover what could derail the sale once the buyer’s lawyers are already deep into due diligence.

The businesses that get ahead of these issues don’t just sell for more, they sell faster, with far less stress and spend far less of their post-completion life worrying about a warranty claim hanging over their heads. They also typically save on costs. It is worth investing some time and money upfront to ensure the business is properly prepared and any potential issues are addressed before going to market. This can help avoid the risk of a transaction stalling or collapsing months down the line or requiring fundamental changes that result in significant wasted time and costs.

It can also be challenging for business owners to manage the demands of extensive due diligence enquiries alongside the day-to-day running of the business. Getting the right support early and having everything organised in advance can make the process considerably smoother and less stressful.

If you’re thinking about an exit in the next few years, get ahead of the game and come and talk to us now.

This article is for general and informational purposes only and does not constitute legal advice. To discuss preparing your business for sale, or to talk  through an ongoing matter, please get in touch with a member of the Furley Page Corporate and Commercial team.