Due diligence is the stage most business owners dread — and most are underprepared for. It is the point at which a buyer who has agreed heads of terms puts the business under a microscope, usually with a team of advisors whose explicit job is to find problems.
What they find — or what they don’t find — determines whether the deal completes, at what price, and on what terms.
The best preparation for due diligence is not to manage the process better when it starts. It is to have spent the preceding two to three years building a business that can withstand it. But understanding the process itself — what buyers are looking for and why — gives you a framework for prioritising that preparation.
The structure of a due diligence process
In a private company acquisition, due diligence typically runs in parallel across three workstreams:
Financial due diligence (FDD) — conducted by an accounting firm on behalf of the buyer. They review three to five years of management and statutory accounts, interrogate the EBITDA figure, look for add-backs and adjustments, assess working capital, and build a normalised earnings model. They are specifically looking for anything that makes the headline EBITDA figure misleading.
Commercial due diligence (CDD) — a review of the market, the competitive position, the client base, and the sustainability of the revenue model. This may involve customer interviews. The question being answered is: will this business still be generating this level of profit in three to five years’ time?
Legal due diligence (LDD) — conducted by the buyer’s solicitors. They review every material contract — customers, suppliers, employees, leases, IP, and any pending or historic litigation. They are specifically looking for things that would change under a change of control, things that create liability for the acquirer, and things that suggest the business is more fragile than it appears.
There is often a fourth workstream — management due diligence — in which a third party assesses the quality and depth of the senior team. For larger transactions, this is almost always included.
What financial due diligence uncovers
The FDD team starts with your accounts and works toward a single question: is the EBITDA figure the seller is presenting the real, normalised, maintainable earnings of this business?
The most common issues they find:
Personal expenses mixed with business costs. Vehicles, travel, private health insurance, meals — anything that would not be incurred by a new owner. These can legitimately be added back to EBITDA, but they need documentation. An undocumented add-back looks like a fabrication.
Revenue recognition timing. If your business has significant deferred revenue, contract revenue, or milestone-based billing, the accounting treatment matters. Buyers will want to understand the revenue cycle and what the accounts actually represent.
Working capital quality. Buyers will assess what level of working capital is required to run the business normally. If there is a seasonal spike, or if debtors have been allowed to extend, or if stock has built up, these affect the normalised capital position and the completion accounts adjustment.
Customer concentration in the revenue. If one client represents 30% of revenue, the FDD team flags it. If that client’s contract is up for renewal in twelve months, they flag it more loudly.
Intercompany transactions. If you have related-party transactions — loans to or from associated entities, management charges, cross-company arrangements — they will be examined carefully and will need clear justification.
What commercial due diligence tests
Commercial due diligence is increasingly rigorous at all deal sizes. Buyers — whether trade or private equity — want to understand whether the business will continue to perform as represented.
Client retention and churn. If buyers commission client interviews (and they often do), clients will be asked directly about their relationship with the business, their plans to continue buying, and their experience of the service. This is where owner-held relationships become visible.
The competitive landscape. How differentiated is the business? What would happen to the client base if a well-resourced competitor entered the market? Is the margin sustainable?
Dependency on key personnel. Beyond the owner, are there other individuals — a top salesperson, a key technical specialist, a client manager — whose departure would create material risk?
Pricing power and margin. Can the business raise prices? What has happened to margins over the last three years?
Concentration in any dimension. Client concentration, supplier concentration, geographic concentration — any single dependency creates a risk that buyers want to understand and price.
What legal due diligence finds
Legal due diligence is often underestimated by sellers. It is among the most thorough elements of the process and can surface issues that fundamentally change the deal structure.
Change of control clauses. Many contracts — particularly with large corporate clients, lenders, or property landlords — contain provisions that allow the other party to terminate or renegotiate on a change of ownership. These are often buried in standard terms and have never been reviewed. Finding them late in a process is expensive.
IP ownership. Who owns the intellectual property? If software, processes, or branded assets were developed by freelancers or in joint ventures, ownership may be unclear. Buyers will want clean, unencumbered IP.
Employment contracts and restrictive covenants. Are key employee contracts current and properly documented? Do they contain appropriate non-compete and non-solicit provisions? Are any employees outside the formal payroll?
Leases and property arrangements. Is the lease in the business’s name? Is the landlord’s consent required for a change of control? Are there personal guarantees from the owner?
Historic litigation or regulatory issues. Any pending claims, regulatory investigations, or unresolved disputes will be uncovered and will affect the deal structure — often through escrow arrangements or price adjustments.
The data room
By the time due diligence begins, a well-prepared seller should have a data room ready — a secure repository containing all the documents the buyer’s team will request. A data room that is complete, organised, and consistently maintained signals professionalism and reduces the time and friction of the process.
A basic data room includes:
- Three to five years of audited statutory accounts
- Monthly management accounts for the current and prior years
- All material customer contracts, with change of control provisions identified
- All supplier contracts above a material threshold
- All employment contracts and staff terms
- IP registrations and ownership documentation
- Property leases and landlord correspondence
- Any shareholder agreements, loan notes, or related-party agreements
- Insurance policies
- Corporate structure and ownership documentation
Building this takes time. Doing it under the pressure of an active process is stressful and creates gaps. Doing it eighteen months before you intend to start the process means you can identify and fix problems before they become deal-killers.
The exit readiness principle
The underlying principle of exit readiness is simple: everything that comes out in due diligence was already true before due diligence started. The buyer’s team did not create the problems they found. They found problems that already existed.
The difference between a clean process and a damaged one — between a deal that completes at the agreed price and one that is retooled, repriced, or abandoned — is whether those problems were found by the seller before the buyer’s team arrived.
That is what exit preparation is. A structured, honest assessment of your business from a buyer’s perspective, conducted early enough to fix what needs fixing before anyone is looking.
The 7 Mills Score assesses your business across seven dimensions of exit readiness — including financial clarity, contract hygiene, and the structural factors that drive due diligence risk. It takes 8 minutes and is free.