Due diligence is the buyer's process of verifying everything a seller has told them before completing a purchase. It covers financial, legal, commercial, operational, tax, staff, lease, assets and data — and it is the last realistic opportunity to find problems before they become yours.
Quick Answer
Due diligence means checking the evidence behind the numbers, the title to what you are buying, the condition of what transfers, and the risks you are taking on. Most buyers underestimate how much time and documentation proper due diligence requires. Skipping it — or rushing it — is one of the most common and costly mistakes in business acquisitions.
In short:if the seller cannot provide evidence, that is itself information. A legitimate, well-run business should have documentation for everything listed in this guide.
Contents
What due diligence is and why it matters
Due diligence is the structured process of verifying that the business you are buying matches what you have been told. It happens after an offer has been accepted in principle — usually after heads of terms are signed — and before legal completion.
It is your last serious opportunity to:
Confirm the financials are accurate and sustainable
Identify liabilities, disputes or tax issues you would inherit
Verify that assets, contracts and leases transfer as expected
Assess risks that were not apparent in the initial listing
Renegotiate the price if material issues are found
Walk away if the deal no longer makes sense
Most buyers who have a bad experience acquiring a business either skipped due diligence, trusted the seller's word on key points without verifying, or did not use professional advisers to help interpret what they found.
Due diligence does not guarantee a good outcome — but it significantly increases the chance of one.
What due diligence is not
Due diligence is not a negotiating tactic or an excuse to waste the seller's time. It is a genuine verification process, and sellers expect it. A buyer who raises dozens of irrelevant queries, drags the process out unreasonably, or uses minor findings to justify a large price cut will damage trust and may lose the deal.
It is also not a substitute for your own commercial judgement. The process tells you what is there — you still need to decide whether it is enough.
When to carry out due diligence
Due diligence typically starts after heads of terms are agreed and before exchange of contracts or completion. In most SME transactions the sequence is:
Listing viewed, initial enquiry made
Seller questions asked, NDA signed, financial overview provided
Meeting with seller, site visit
Indicative offer made and accepted in principle
Heads of terms signed— this is the trigger for formal due diligence
Due diligence period (typically 4–8 weeks for a small business)
Legal documents drafted and reviewed
Final price agreed, any adjustments made
Exchange and completion
Some buyers do light-touch preliminary checks before making an offer — reviewing the lease, checking Companies House, confirming the accounts are consistent — but the main due diligence process happens once both parties have committed to progressing seriously.
The due diligence period should be defined in the heads of terms. A typical period for an SME acquisition is four to eight weeks. Complex businesses, businesses with property, or regulated sectors may need longer.
Financial due diligence
Financial due diligence is the most important category for most buyers. You are trying to confirm that the profit figures presented in the listing are accurate, sustainable and based on proper accounting.
Accounts and profit verification
Request three years of filed accounts (profit and loss, balance sheet, notes)
For limited companies, cross-check filed accounts with Companies House records
Review management accounts for the current year
Ask for bank statements for the last 12–24 months and verify that income matches what is reported
Check that the revenue trend is consistent — sudden spikes or unexplained dips need explanation
Verify VAT returns reconcile with the reported revenue figures
Review aged debtors and creditors lists — are any debts old or unrecoverable?
EBITDA and add-backs
Obtain the seller's adjusted EBITDA calculation and supporting schedule
Challenge each add-back: is it genuinely non-recurring? Is there evidence?
Verify owner salary is correctly stated — check payroll records
Confirm any personal expenses claimed as add-backs with invoices or bank statements
Check whether rent, insurance or other key costs are at market rate
Cash and working capital
Request a current cash position and bank balance confirmation
Review working capital cycle — how long between invoice and payment, and payment and supplier settlement?
Identify any seasonal cash flow patterns
Check whether the seller has drawn down cash unusually close to the sale
Confirm what working capital will be in the business at completion
Debt and liabilities
Request a full list of all business loans, hire purchase agreements and finance leases
Check for director loan accounts — what is owed to or from the company?
Verify HMRC balances — corporation tax, PAYE, VAT — are all up to date
Check for any outstanding CCJs (County Court Judgements) against the company
Review the creditors list for any overdue or disputed amounts
Legal due diligence
Legal due diligence confirms that the seller has the right to sell what they are selling, that no hidden liabilities exist, and that the assets and contracts you expect will transfer cleanly.
Company and ownership
For a limited company, obtain and review the latest confirmation statement from Companies House
Confirm the shareholding structure — who are the legal owners, and do they all agree to sell?
Check for any charges registered at Companies House (loans secured against the business)
Review the articles of association for any restrictions on share transfer
Confirm there are no outstanding share option schemes or convertible instruments
Contracts and customers
Request copies of the top 5–10 customer contracts or agreements
Check whether any contracts contain change of control clauses — these may allow customers to exit if ownership changes
Review supplier contracts for similar provisions
Check any exclusivity, non-compete or territory agreements the business is subject to
Verify intellectual property ownership — are domain names, trademarks, software licences and brand assets in the company's name?
Litigation and disputes
Ask the seller to confirm in writing whether there are any current or threatened legal disputes
Check Companies House for any winding-up petitions or court orders
Ask whether any warranty claims, customer complaints or regulatory proceedings are pending
Request details of any disputes in the last three years, even if resolved
Regulatory and licences
Identify every licence, permit or accreditation the business needs to operate
Confirm which licences are transferable and which require new applications
Check compliance status — are all licences current and in good standing?
For regulated sectors (care, childcare, financial services, food, transport), check with the relevant regulator
Commercial due diligence
Commercial due diligence assesses whether the business model is real, sustainable and transferable to a new owner.
Customer base
Request a customer list with revenue per customer for the last two to three years
Calculate customer concentration — what percentage of revenue comes from the top 5 customers?
Ask how long the key customers have been buying, and whether there are contracts or informal relationships
Find out whether the seller's personal relationship with key customers is the main reason they buy
Check for any recently lost customers or contracts
Revenue quality
Separate one-off revenue from recurring or repeat revenue
Identify any contracts ending soon — and whether there is evidence of renewal
Check whether any revenue in the accounts relates to work done before completion that will not recur
Review any pipeline — is future revenue contracted, verbal, or speculative?
Market and competition
Understand what the competitive environment looks like — are there new entrants, pricing pressure, or online substitutes?
Assess whether the business has a defensible position or is competing on price alone
Check the sector for any structural headwinds — is this market growing or shrinking?
Owner dependency
How much of the revenue is dependent on the owner personally?
Could the business run for a month without the seller? Six months?
Are there staff who could manage key relationships during and after handover?
What handover support is the seller offering, and is it contractually committed?
Tax due diligence
Tax due diligence is often underestimated by first-time buyers but is critical — particularly in share purchases where you inherit the company's entire tax history.
Corporation tax
Request the last three years of corporation tax returns (CT600)
Confirm all corporation tax has been paid and there are no outstanding enquiries from HMRC
Check for any HMRC investigations, open enquiries or tax avoidance schemes
Review the company's tax computation for unusual items
VAT
Confirm the business is VAT registered and check the VAT registration number
Review the last 12 months of VAT returns and check they reconcile with the accounts
Check whether the business operates any special VAT schemes (flat rate, cash accounting, margin scheme)
If this is an asset purchase that may qualify as a Transfer of Going Concern (TOGC), confirm the conditions with your tax adviser — see theVAT and TOGC Guide
PAYE and payroll
Confirm PAYE is up to date with no outstanding liabilities
Review payroll records and check they are consistent with the employment contracts
Check whether any workers have been misclassified as self-employed when they should be employees — this is an HMRC risk area
Verify National Insurance contributions are fully paid
Capital Gains Tax (share purchases)
In a share purchase, the company's tax history transfers with it. Your accountant should check:
Whether there are any unresolved tax disputes or historic HMRC enquiries
Whether any transactions in the company's history could attract later challenge
Whether R&D tax credit claims are supportable
Whether any tax losses being used by the business are at risk
You must seek independent, qualified tax advice before completing any acquisition where share purchase is involved. See also theTax When Selling a Business Guidefor context on how sellers approach tax structure.
Staff and employment due diligence
Staff are often the most valuable — and most volatile — asset in a business sale. Understanding who the business depends on, what their terms are, and what rights transfer is essential.
Employment records
Request a full staff list: names, roles, start dates, salary, hours, contract type
Review a sample of employment contracts — are they written, up to date, and signed?
Check notice periods, restrictive covenants and garden leave clauses for key staff
Identify any zero-hours, part-time or irregular workers and check their status
TUPE
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) may apply where employees transfer with a business. Where TUPE applies:
Employees transfer on their existing terms and conditions
Enhanced redundancy rights may apply
Dismissals connected to the transfer may be automatically unfair
Employees must be informed and, where applicable, consulted
Whether and how TUPE applies depends on the deal structure and circumstances. You should seek independent legal advice on TUPE obligations before completion. Do not assume TUPE does or does not apply without advice.
Key person risk
Identify any employees whose departure would significantly harm the business
Check whether those employees have been informed of the sale, and whether they are likely to stay
Consider requesting key staff retention bonuses or notice periods as part of the deal structure
Disputes and tribunal claims
Ask the seller to confirm whether any employment tribunal claims are current or threatened
Check whether any employees have raised grievances in the last two years
Review any settlement agreements — what was paid and why?
Lease and premises due diligence
For businesses operating from leased premises, the lease is often one of the most important due diligence items. A lease that cannot be assigned, expires soon, or carries large obligations can significantly affect the deal.
Lease terms
Obtain and read the full lease document (not a summary)
Confirm the lease length remaining and the break clause dates
Review the rent — is it at market rate? Has it recently been reviewed?
Check the rent review mechanism — is it upward-only, RPI-linked, or open market?
Understand the repairing obligations — is the lease full repairing and insuring (FRI)?
Assignment and consent
Check whether the lease can be assigned to a buyer, and whether landlord consent is required
Contact the landlord (or ask the seller to) to confirm they will consent to assignment in principle
Check whether the buyer will need to provide a personal guarantee, or whether the seller's guarantee can be released
Identify any outstanding dilapidations — the condition the property must be returned in
Subletting and alterations
Review whether any subletting arrangements are in place
Check whether any alterations have been made to the premises without landlord consent — this can create a liability
Freehold property
Where the business owns its premises, the due diligence includes full property searches, title review, environmental surveys and valuation. This is a significant additional workload and usually requires a specialist property solicitor.
Asset and stock due diligence
Equipment and plant
Request a full asset register listing all fixtures, fittings, vehicles and equipment
Verify which assets are owned outright and which are subject to hire purchase or lease — finance agreements do not transfer automatically
Check the age and condition of key equipment — is immediate capital expenditure needed?
Confirm that all assets listed are physically present and in working order
Stock
If the business holds stock, agree a method for valuing it at completion
Check whether stock is current and saleable — old, obsolete or damaged stock should be excluded or discounted
Review how stock is recorded in the accounts — is it valued consistently year to year?
Intellectual property
Confirm ownership of all domain names, websites, social media accounts and trademarks
Check that IP is registered in the company's name, not the owner's personal name
Review any software licences — are they transferable?
Check for any third-party IP claims or infringement issues
Data, digital and systems due diligence
Data protection and GDPR
Check that the business has a current privacy policy and a data protection registration with the ICO (Information Commissioner's Office)
Review how customer data is stored and whether it has been collected lawfully
Identify any data breaches in the last two to three years and how they were handled
Understand what customer data you are acquiring — personal data carries legal obligations under UK GDPR
IT systems and software
List all software, platforms and subscriptions the business relies on
Check which are in the owner's personal name versus the company — these may not transfer automatically
Confirm access credentials will transfer at completion
Review any custom software or systems — who owns them, and is there documentation?
Online presence
Confirm the business owns its domain names and website content
Check Google Analytics and organic search rankings — are they stable or declining?
Review any Google My Business or directory listings — do they show accurate, consistent information?
Check social media account ownership — are accounts in the business name or the owner's personal name?
Sector-specific due diligence
Some sectors require additional due diligence that goes beyond the standard checklist.
Care and childcare:CQC or Ofsted registration does not transfer — the buyer must apply for their own registration. Check the current inspection rating, any enforcement notices, and staffing ratios. Confirm the business can continue to operate during the registration period.
Food and hospitality:Check food hygiene ratings, licences (alcohol, entertainment), lease terms and EHO inspection history. Review supplier contracts and check whether the premises has any outstanding enforcement notices.
Financial services:FCA authorisation does not transfer. Check whether the business is authorised, what permissions it holds, and what the process is for transfer of authorisation or change of control notification.
Transport and logistics:Check operator licences, vehicle roadworthiness records, driver compliance and CPC holder status. Licences are person-specific and may not transfer.
Franchises:The franchisor must approve the transfer. Obtain the franchise agreement, check transfer fees, renewal terms and any territory restrictions. Speak directly to the franchisor before completing.
What to do when something goes wrong in due diligence
Finding issues in due diligence is normal — and is exactly what the process is designed for. What matters is how you respond.
Minor issues
Minor discrepancies — a slightly different stock valuation, a small VAT underpayment, an asset register that is slightly out of date — can often be resolved through a price adjustment, a warranty in the sale agreement, or an undertaking by the seller to resolve the issue before completion.
Material issues
Material issues — significant undisclosed liabilities, accounts that are materially different from what was presented, a key customer contract that is about to leave, a lease the landlord will not assign — require serious consideration. Your options are:
Renegotiate the priceto reflect the reduced value or increased risk
Require the seller to resolve the issuebefore completion (e.g. pay off a tax liability, obtain landlord consent)
Require an indemnityin the sale agreement covering the specific risk
Withdraw from the dealif the issue is fundamental and cannot be resolved
Deal-breaking issues
Some findings justify walking away: undisclosed litigation that creates significant liability, accounts that are materially misleading, a regulatory position that makes the business non-transferable, or a key person (staff, customer, supplier) confirming they will leave at change of ownership.
Walking away from a deal is disappointing, but completing on a business with serious undisclosed issues is far worse.
Always communicate through your solicitor when raising significant issues — not directly with the seller — once legal process has begun.
Full due diligence checklist
Financial
Three years of filed accounts
Management accounts for the current year
Bank statements for 12–24 months
VAT returns for 12–24 months
Add-backs schedule with supporting evidence
Aged debtors and creditors list
Director loan account balance
All loan and finance agreement details
HMRC balance confirmation — corporation tax, PAYE, VAT
Legal
Companies House confirmation statement and accounts
Shareholder details and share transfer documentation
Any registered charges or debentures
Top customer and supplier contracts
IP ownership — domains, trademarks, software
Confirmation of no current or threatened disputes
All licences and permits with expiry dates
Commercial
Customer revenue breakdown (top 10 customers)
Contract renewal status for key customers
Lost customer analysis (last two years)
Pipeline evidence — what is contracted vs verbal
Tax
Three years of corporation tax returns (CT600)
VAT registration and returns
Payroll and PAYE records
HMRC correspondence — any open enquiries?
Confirmation of no tax avoidance schemes
Staff
Full staff list with roles, start dates, salaries
Sample employment contracts
TUPE analysis with legal advice
Confirmation of no current tribunal claims
Key person retention assessment
Lease and premises
Full lease document
Landlord consent to assign (in principle)
Rent review history and upcoming review dates
Dilapidations assessment
Schedule of condition
Assets and stock
Full asset register
Finance or HP agreements on assets
Stock valuation method and count
IP ownership confirmation
Data and digital
ICO registration
Privacy policy and GDPR documentation
IT systems list and access credentials
Domain and website ownership
Social media account ownership
FAQs
How long does due diligence take?
For a small business (under £500,000), a thorough due diligence process typically takes four to six weeks. More complex businesses, those with property, regulated sectors or multiple entities may take eight to twelve weeks. The timeline depends on how quickly the seller provides documentation and how many issues arise.
Do I need professional advisers for due diligence?
Yes. At minimum you need a solicitor to review legal documents and a qualified accountant to review the financials. For regulated sectors, specialist advice may also be needed. The cost of professional advice is small compared to the cost of completing a deal with undisclosed problems.
What is a data room?
A data room is a secure virtual folder (usually a shared cloud drive or specialist platform) where the seller collects all the due diligence documents in one place. It allows the buyer and their advisers to review documents systematically and keeps a record of what was shared and when. Not all SME sellers use a formal data room — many share documents informally — but it is best practice and reduces disputes later about what was disclosed.
What if the seller won't provide documentation?
A seller who refuses to provide standard due diligence documentation is a serious warning sign. Legitimate sellers expect to provide evidence — accounts, contracts, leases, VAT returns — as a normal part of the process. Reluctance to share documentation (beyond reasonable confidentiality concerns) suggests either that the documentation does not exist, or that it reveals something the seller does not want you to know. Either is a reason to be very cautious.
Can I do due diligence before making an offer?
You can do preliminary checks — reviewing Companies House, checking the lease length, confirming the accounts are consistent with the listing — before making an offer. Full due diligence, including access to contracts, staff details and tax records, normally only happens after an offer is accepted and heads of terms are signed, because the seller will not share sensitive information without some commitment from the buyer.
What is an indemnity?
An indemnity is a contractual promise by the seller to compensate the buyer pound-for-pound for a specific risk or liability. It is stronger than a warranty. Indemnities are used when a specific issue has been identified during due diligence — for example, a potential HMRC liability, an unresolved supplier dispute, or a known dilapidations claim. Your solicitor will advise on whether the issue warrants an indemnity or a warranty.
Should I get professional advice?
Yes. Due diligence for a business acquisition is not a process you should attempt without legal and accounting support. The risks of missing something material are significant and potentially irreversible once completion has occurred.
Key takeaways
Due diligence happens after heads of terms are signed and before legal completion — it is your last opportunity to verify what you are buying.
Financial due diligence must confirm that profit figures are accurate, sustainable and evidenced — not just that they look plausible.
Legal due diligence confirms ownership, transferability, contracts, IP and the absence of undisclosed liabilities.
Tax due diligence is critical in share purchases — you inherit the company's entire tax history.
TUPE may apply where staff transfer — seek independent legal advice before assuming it does or does not.
Lease due diligence is essential — a lease that cannot be assigned, expires soon or carries large obligations can kill a deal.
Data protection (UK GDPR) obligations transfer with the customer data — check ICO registration and data handling practices.
Finding issues in due diligence is normal — it can lead to price adjustments, indemnities or renegotiation; only walk away if issues are fundamental.
Always use a solicitor and accountant for business acquisition due diligence.
Related resources
Important disclaimer
Buy a Business Ltd is a marketplace, not a broker. Information, guides, checklists and examples on this site are for general guidance only and do not constitute legal, tax, financial, investment, valuation, brokerage or regulated advice.
Buying a business involves significant financial and legal risk. You should seek independent professional advice — including from a qualified solicitor, accountant and sector specialist — before making any decision about buying or financing a business.
Sources and useful references
Companies House: company search and filing history
ICO (Information Commissioner's Office): data protection registration
HMRC: PAYE, VAT and corporation tax guidance
GOV.UK: TUPE guidance for employers and employees
British Business Bank: SME acquisition finance guidance