Due diligence: what buyers look for and how deals fail
What a buyer examines, what they find, and how to make sure nothing found in diligence re-prices your deal.
Due diligence is where most SME deals die. Not because businesses turn out to be bad, but because something was discovered rather than disclosed.
What a buyer examines
Financial. Three years of statements reconciled to bank records. Revenue recognition. The normalisation adjustments and whether they hold up. Working capital, and what a normal level looks like. Debt, including director loans and hire purchase.
Legal. Corporate records: ACRA filings, register of members, register of controllers, board resolutions, past share transfers and whether they were stamped. Material contracts and any change-of-control clauses. Tenancies. Licences. Litigation and insolvency searches. Employment records including CPF.
Commercial. Customer concentration and tenure. Supplier dependency. Competitive position. The pipeline, and whether it is real.
Operational. Systems, key people, equipment condition, compliance history.
The distinction that decides the outcome
Disclosed issues get priced or warranted. Discovered issues get used as leverage to re-trade the entire deal.
If there is something in your business you would rather a buyer did not find, they will find it, and the cost of them finding it is several times the cost of you disclosing it. Put it in the memorandum, with the mitigation, and it becomes a known factor rather than a reason to reopen the price.
Preparing the pack before anyone asks
Assemble the diligence pack during preparation, not when the first request list arrives. Statements, statutory records, contracts, licences, the tenancy, employment records, asset register, insurance. Index it. Every week you save here is a week of momentum you keep.
The data room
Access granted per buyer and per document, with views logged. Sensitive material such as customer names and staff details is released late, after a term sheet is signed.
Keep trading
The most common cause of a price reduction between term sheet and completion is not a diligence finding. It is a dip in trading because the owner stopped running the business to run the sale. That is precisely what an advisor is for.
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