Due diligence when buying a UK business

An asking price is a claim. Due diligence is where you test it. Up to this point you have been working from a seller's information memorandum, a few headline figures and however honestly the broker or owner has answered your questions. Everything is still asserted, nothing is yet proven.

Heads of terms changes the dynamic in your favour. The seller now has a motivated buyer and a reason to want the process to move quickly, which is exactly when thorough checking matters most. Most UK buyers spend 6 to 12 weeks here. Rushing it to keep the seller happy is how buyers end up owning a business that is not the one they thought they bought.

Due diligence sits in four categories: financial, legal, commercial and operational. Each answers a different question, and a clean result in one does not make up for a problem in another.

The goal is a verified, normalised earnings figure you would be comfortable defending to a lender, not the number on the seller's one-page summary. Three things matter most.

Reconcile the add-backs

Sellers adjust reported profit upward for one-off costs, personal expenses run through the business and above-market owner salary, to show what the business earns under new ownership. Some of this is legitimate. All of it needs evidence. Ask for the invoice or payroll record behind every add-back over £1,000, not just the explanation.

Separate cash from accrual

A business can show a healthy profit and still run out of cash, usually because of slow-paying customers, a build-up of stock, or supplier terms that have quietly shortened. Compare the profit and loss account against actual bank statements for the same period. A persistent gap between the two is a working capital problem you will inherit on day one.

Check the trend, not just the latest year

A single strong year can be a fluke, a one-off contract, or a push to make the business look good before sale. Three years of filed accounts plus current management accounts let you see whether turnover and margin are genuinely improving or whether this year was dressed for the market.

Legal review confirms the business actually owns what it is selling, and that nothing undisclosed could land on your desk after completion.

• Title to the premises, or the lease: length remaining, break clauses, rent reviews, and whether assignment or a new lease is needed on change of ownership
• Material contracts with customers and suppliers: are they assignable to you, and do any contain change-of-control clauses that let the other party walk away
• Outstanding or threatened litigation, HMRC disputes, and regulatory or licensing issues
• Intellectual property: is the trading name, domain and any registered marks actually owned by the company, not personally by the seller
• Employment contracts, any TUPE implications if you are buying the business rather than just its assets, and director or shareholder agreements
• Existing finance, charges registered against the company at Companies House, and personal guarantees that need releasing on completion

A solicitor experienced in SME acquisitions, not general practice, should run this. Expect legal fees of roughly 1 to 2% of deal value for a straightforward purchase under £1m.

This is where you test whether the revenue is durable. Numbers that check out financially can still sit on a customer base that is about to walk.

• Customer concentration: any single customer above 20% of revenue is a real dependency, and above 40% is a serious one worth repricing the deal over
• Contract versus repeat-trade revenue: contracted, recurring income is worth more than the same turnover built on one-off or discretionary spend
• Why customers actually buy: price, relationship with the owner personally, location, or something structural. Relationship-based revenue is the hardest to retain through a change of owner
• Supplier concentration and whether terms, pricing or exclusivity depend on the outgoing owner's personal relationships
• The real competitive position: who else operates in the same catchment or niche, and whether a competitor has recently entered or expanded

The last check is whether the business runs without the person selling it to you.

• Key person dependency: which relationships, skills or decisions exist only in the owner's head, and what happens to each one the day they leave
• Staff: who is likely to stay through a change of ownership, who is on notice periods that matter, and whether any wage or contract terms were quietly improved shortly before the sale
• Systems and equipment: age and condition of anything material to operating the business, and any deferred maintenance the seller has put off
• Permits, licences and compliance records relevant to the sector, and whether they transfer or need reapplying for

Three professionals cover almost every UK SME purchase. An accountant verifies the numbers and, for larger or more complex deals, can run a formal financial due diligence report rather than a desk review. A solicitor specialising in business sales handles the legal checks and drafts the sale and purchase agreement. For sector-specific risk, such as a licensed premises, a healthcare business or anything regulated, a specialist adviser in that field is worth the additional fee.

Budget 2 to 4% of deal value for professional fees across accounting and legal work combined. On a £5,000 fee that stops you buying a £200,000 problem, the maths is not close.

1. Initial document request and review: 1 to 2 weeks
2. Financial and legal verification in parallel: 3 to 6 weeks
3. Site visits, staff and customer conversations where appropriate: 1 to 2 weeks
4. Findings report, renegotiation if needed, and final sign-off: 1 to 2 weeks

6 to 12 weeks total is typical for a UK SME purchase under £2m. Asset-heavy or regulated businesses tend to run longer. A seller pushing hard to compress this timeline, without a credible reason, is itself worth noting.

• Add-backs the seller cannot evidence when asked directly
• A material customer or contract that turns out not to be assignable to you
• Undisclosed litigation, HMRC enquiries or regulatory action
• A working capital gap between reported profit and actual cash that the seller cannot explain
• Revenue that depends on the outgoing owner's personal relationships with no transition plan
• Resistance to a request that is standard practice, such as bank statements or supplier contracts

Most findings are negotiable: a lower price, a retention held back at completion, or seller warranties covering the specific risk. A small number are not. If the seller's story and the evidence stop matching on something material, walking away costs you professional fees. Completing anyway costs considerably more.