Due Diligence When Buying a Business: A Practical Checklist

Due diligence is the work you do after your offer is accepted and before you are committed, to check that the business is what it was described as. It is your chance to find problems while you can still renegotiate the price or walk away. Your accountant and solicitor will do much of it, but you need to know what to ask for. This checklist covers the areas that matter for most small and medium UK businesses.

The figures

At least three years of accounts, and the latest management figures for the current year. Look at the trend, not just the last year.
Bank statements for the same period. Takings in the accounts should match what went into the bank. If they do not, find out why.
VAT returns, which give an independent record of sales.
Add-backs. If the asking price is based on an adjusted profit, get the list of adjustments and check each one. Owner's salary, personal car costs and one-off spending can be fair add-backs; "cash takings not in the accounts" is not something a lender or a careful buyer will rely on.
Gross margin by month. A margin that changes sharply can point to pricing problems, waste or stock issues.
Seasonality: when are the strong and weak months, and what happens to cash in the weak ones?

The premises

The lease: term left, rent, rent review dates, repairing obligations, break clauses, permitted use, and whether the landlord's consent is needed to assign it to you. See our guide to buying a leasehold business.
Whether the lease has security of tenure under the Landlord and Tenant Act 1954, or has been contracted out of it.
The condition of the building and equipment, and any dilapidations you could be liable for at the end of the lease.
Planning use class and any building regulations issues with past alterations.
For a freehold, a full property survey and the usual conveyancing searches.

The people

A list of staff with roles, pay, hours, length of service and contracts.
Any disputes, grievances or tribunal claims, past or pending.
Holiday owed, and any promises made about pay rises or bonuses.
Who the key people are, and whether they are likely to stay.

In most purchases of a business as a going concern, employees transfer to the buyer on their existing terms under the TUPE regulations, so you take on their contracts and length of service.

Customers, suppliers and contracts

How concentrated the sales are: does one customer account for a large share?
Contracts with customers and suppliers, and whether they can be transferred to you.
Equipment leases and finance agreements that will pass to you or need settling.
Online reviews, the website, social accounts and domain names, and who owns them.

Licences, registrations and compliance

Licences the business needs and whether they transfer: for example premises and personal licences for alcohol, CQC registration for care services, food hygiene ratings, waste carrier or other trade licences.
Health and safety, fire risk assessments and any inspection reports.
Any notices or correspondence from the council, HMRC or regulators.

Liabilities and risks

Debts, finance and charges over the assets (and, in a share purchase, everything the company owes or has done).
Outstanding tax, and how VAT will be handled on the sale.
Warranty and guarantee claims from customers.
Anything in the area that could change trade: road works, new competitors, redevelopment.

Using what you find

Due diligence rarely finds a perfect business. The point is to know what you are buying. Small issues can be dealt with in the sale agreement through warranties, indemnities or a lower price; serious ones are a reason to walk away. Write down every question as you go, get the answers in writing, and do not let a deadline push you into completing before you are satisfied.