Over the last few years we've worked with many founder-managed businesses. One of the key things impacting transaction outcomes, no matter the size or sector, is the preparedness of a business ahead of exit. 

Over the last few years in the M&A industry, we’ve worked with many founder-managed businesses varying in size, sector and strategy. One of the key things impacting transaction outcomes is the preparedness of a business ahead of exit. While it may seem that preparation only becomes critical the closer to a sale you get, the reality is that the quality and availability of information over time is fundamental to building buyer confidence.

In our experience, successful transactions are typically underpinned by availability of consistent historical data and a clear, credible strategy for future growth. Conversely, we’ve seen transactions fall over at various points in a deal, but the most common stage is during due diligence.

The six core diligence areas include financial, commercial, operational, legal and increasingly, technology and ESG. The earlier a business invests in developing and streamlining their processes within these areas, the more likely a smooth and successful exit.

In this series, which will be updated regularly, we will guide you through each of the due diligence streams in more detail, through the lens of an M&A advisor. We'll explore the typical focus areas, common pitfalls, insights from transactions we've worked on, and some pointers to elevate chances of success.

The first two diligence areas – financial (including tax) and legal - are two of the most fundamental ones for any transaction and many business owners will likely see the most scrutiny applied here.

Financial

Financial due diligence focuses on both the historical and forecast performance of the business, as well as its quality of earnings.

Establishing robust financial systems and processes from an early stage helps to build financial discipline. The implementation of a professional accounting system and controls will ensure financials are documented in a systematic manner from the start. Solid evidence of past performance, including management accounts that tie to statutory accounts and detailed account breakdowns (e.g. aged receivables listing, fixed asset register, revenue breakdowns etc.), instils trust in the business’ underlying fundamentals and business model. 

Forecasts play a pivotal role in shaping valuation expectations. They need to strike the right balance between ambitious and achievable, as buyers may base their valuation on an outturn of current earnings or the future earnings potential of the business. Having credible, data-backed assumptions behind revenue and cost projections (e.g. pipeline visibility, hiring plans etc.) and preparing a fully integrated 3-Statement Model to demonstrate the assumptions, will substantiate the growth story and excite prospective buyers. 

Valuations for most mature businesses (sector-dependent) are typically based on a multiple of an adjusted EBITDA, which reflects the typical current or future trading performance of the business. Quality of earnings analysis will scrutinise proposed adjustments (e.g. excessive salaries for management, market-level rent, division set-up costs, restructuring costs etc.) with subjective items often being challenged during diligence. Engaging an experienced corporate finance advisor to validate the rationale and calculations behind these adjustments is essential.

A key sub-stream of financial diligence is tax diligence, often carried out by tax specialist teams. There are some common pitfalls we’ve come across in M&A processes, which may result in a price chip later in the process. These include undisclosed tax liabilities and penalties, exposure to foreign tax issues, and lack of knowledge about tax losses and tax credits being usable in the company structure post-transaction. It is advisable to have a dedicated tax expert reviewing all compliance measures from early stages of the business.

Legal

One of the most critical, and often time consuming, stages in a transaction is legal due diligence. The lawyers analyse every aspect of the business, including the following (which is by no means an exhaustive list):

• Corporate structure and governance documents (e.g. articles of incorporation, shareholder agreements, board minutes etc.) 

• Material supplier and customer contracts

• Loan agreements, debt terms, and credit facilities

• Intellectual property

• Employment matters (e.g. management team contracts, compliance with labour laws, employee benefit schemes etc.) 

• Real estate - property ownership / rental agreements

• Any ongoing or prior litigation

• Compliance with GDPR and other cybersecurity laws

While business owners are rightly focused on growth and operations, legal and regulatory housekeeping is sometimes neglected. Over time, this can result in administrative oversights - inaccurate or outdated filings, such as Companies House records, are common issues that, while not necessarily deal-breakers, can raise doubts, cause delays, and introduce unnecessary friction during a sale process. For example, Enterprise Management Incentives options schemes written incorrectly or share buybacks being invalid can cause a genuine hit to the valuation or give rise to obstacles in getting the deal over the line.

For businesses operating in highly regulated sectors (e.g. healthcare, financial services), heightened scrutiny is the norm, making proactive legal preparation even more important. Regulatory bodies often have stringent compliance requirements, and buyers will expect clear documentation showing all conditions have been met.

Beyond the diligence phase, the final hurdle in pushing a deal over the line is usually getting through the legals. Successfully negotiating favourable deal terms in the sale & purchase agreement (SPA), limiting warranties and indemnities to the extent possible, and skilfully manoeuvring discussions around disclosures is critical to protect the seller’s position and maximise the value they’ll realise from the transaction: Appointing the right lawyers for your business is key.

Part Two: Commercial and Operational

The next two diligence areas are more focused on the company’s business model and strategy. 

Please note that operational DD is not a formal diligence stream, but we have separated it out here to highlight the importance of the questions raised regarding the management team, business functions, day-to-day processes, and considerations from an integration planning perspective (especially relevant when selling to a trade buyer). 

Commercial

Commercial due diligence assesses business performance, strategy, and market position. 

Being able to demonstrate clear KPIs or client feedback can sometimes be a key step for buyers to feel assured regarding the business’ quality of service and client base. Measuring client KPIs (e.g. client concentration, retention, satisfaction) continuously will not only ease the transaction process itself but can also drive strategic decision-making and efficiencies within businesses, which ultimately drives up value. 

Having a clear, defined strategy is crucial. Though it may seem like growth across multiple avenues is attractive, this can sometimes be off-putting for investors. Therefore, depending on the business and industry, it is usually best to have a streamlined strategy (focusing on quality over quantity) that management are committed to, which is substantiated and can withstand questioning. 

Market dynamics and positioning play a huge role in maximising transaction value. Clarity over exactly what the Total Addressable Market (TAM) is for the business helps buyers assess whether they are investing in an attractive and scalable proposition. For business owners, it’s vital to demonstrate their competitive advantage against the rest of the market and how they will leverage this to garner market share.

Operational

To support a successful transaction and post-deal integration (which is particularly relevant when it comes to trade sales), prospective buyers place significant emphasis on the strength and maturity of a company’s operational infrastructure. A capable and well-organised operations team is critical to ensuring the business runs smoothly day-to-day. This complements the leadership of a strong management team who are focused on strategic growth. It’s important to demonstrate the capabilities of the management and operational teams, without over-reliance on any one individual.

The function which connects the strategic with the operational teams is sales. Buyers will be primed to understand this in the context of how the growth in the TAM will be achieved. We have seen a rise in the focus of diligence around the pipeline, and understanding how the sales team and function is set up underpins this.

Robust front- and back-office processes including Finance, HR, Customer & Supply Chain Management, Compliance, etc., are essential for maintaining operational excellence and minimising business risk. This is important to buyers to determine if systems, processes, and teams can be readily integrated into their organisation without major disruption, and if any operational synergies can be achieved. Increasingly, both strategic and financial buyers expect to see technology embedded across operations to drive efficiency, scalability, and transparency; therefore, investment in tech-enabled processes and tracking data-driven KPIs can enhance a business’s attractiveness and valuation.

Part Three: Technology and Environmental, Social, Governance (ESG)

The final part of this series focuses on two more niche areas of diligence that are becoming increasingly common in transactions – technology and ESG. While these may not seem relevant to every business, we have seen buyers and investors drill down into these areas regardless of operating sector. As a result, there are a growing number of specialist tech and ESG DD providers in the industry.

Technology

Detailed technology diligence has become a standard practice in M&A processes - not only for companies whose core product is technology, but increasingly for businesses across all sectors that identify as ‘tech-enabled’. The last decade has seen significant digital transformation, accelerated further by the Covid-19 pandemic, as business owners have realised the need to embrace technology to remain competitive. As a result, buyers tend to see the highest performing companies as those who are leveraging tech to enable growth and tend to place additional value on those with proprietary technology that is scalable. 

For businesses where technology is their core offering, such as SaaS platforms, diligence covers several highly technical areas, for example reviews of tech stacks, frameworks, and intellectual property rights. Buyers will be interested in the development lifecycle of any proprietary technology, including investment to date, and the future roadmap of the technology to determine scalability. Buyers often focus on the concept of technical debt whereby they assess quality of source code, any shortcuts taken, and potential future risks or costs that could be incurred because of poor tech architecture or lack of testing. This can directly impact valuation and deal terms during negotiations, depending on how core it is to the operations or how much importance the buyer places on it.

For businesses where technology itself is not the core offering but the business is incorporating some form of tech into their operations, such as e-commerce platforms, diligence focus areas will differ slightly. Buyers will focus on the effectiveness of any platforms implemented (e.g. whether it helps automate workflows or generate new leads). Some of the key areas they will look at are how well the technology is integrated, data flow between systems, analytics capabilities for performance monitoring, data security, and more.

Overall, whether it’s a pure tech or tech-enabled business, buyers are looking to determine whether the technology is fit-for-purpose, scalable, and in cases of a trade sale, how it can enhance their own business model. Businesses that successfully navigate the diligence phase and can demonstrate the strength of their technology will reinforce buyer confidence and justify a higher valuation. 

ESG

ESG diligence plays a critical role in evaluating performance through its three pillars (Environmental, Social and Governance). This is essential in the context of risk management, and in enhancing opportunities for long-term sustainable growth and value creation. 

The process typically begins with a materiality assessment to identify the ESG topics most relevant to the business. From there, ESG diligence includes a thorough review of the company’s ESG strategy, a maturity and benchmarking assessment, an evaluation of regulatory compliance and reputational risk, and an analysis of transparency and potential gaps in ESG practices. Consistent, historical data is crucial to identify priorities and demonstrate measurable progress over time.

It’s essential that a business’s ESG strategy is fully aligned and embedded within the broader, corporate strategy. This integration ensures that ESG considerations are not peripheral but are central to decision-making, operational execution, and long-term value creation. Robust ESG diligence is therefore vital for ensuring a business is future-proofed and positioned to mitigate risk and seize opportunities.

ESG has become increasingly central to the agenda of investors and a well-prepared ESG profile can smooth the path to exit and enhance valuation. This increased focus is, in part, being driven by regulation, but above anything else, it’s an expectation amongst consumers. This is driving the desire for inclusion of ESG diligence as part of the standard suite of diligence obtained.

Conclusion

Overall, our experience has repeatedly shown that businesses who proactively prepare for a potential exit ahead of time, tend to be those that instill greater confidence amongst prospective buyers. 

Early and proactive preparation not only helps identify and address risk areas, but also helps strengthen operational foundations, and enhances overall business quality. Whilst every transaction brings its own complexities and nuances, having robust and efficient internal systems and well-maintained documentation in place from the outset will only streamline a transaction process and enhance deal value. Ultimately, transaction readiness not only reduces friction during diligence but also positions the business for a stronger valuation and a more successful outcome.