Due Diligence in business sales and purchases: A practical guide for SME buyers and sellers

kamfaulkner
Oct 1
7 min read

When you’re buying or selling a business, the due diligence process can feel daunting. For many SME owners, it’s the part of the deal that seems the most time-consuming and technical.

Yet it’s also one of the most important steps: it’s where the buyer checks what they are really getting, and where the seller can build confidence in the value and stability of their business.

This guide explains what due diligence is, why it matters, and how it works from both the buyer’s and seller’s perspective. We’ll also look at how to manage the process effectively so it doesn’t slow down or derail your deal.

What is due diligence?

Due diligence is essentially an investigation. When a buyer is looking to acquire a company or a business, they will want to verify key information before they sign on the dotted line.

It’s about answering questions like:

Who really owns the shares or assets being sold?
Are there any debts, risks, or problems hidden in the business?
Are key customer and supplier contracts stable?
Does the business have the people, property, and systems it claims to?

For sellers, due diligence is the process of responding to these checks. That means providing documents, explaining how the business runs, and showing that risks are managed.

Put simply: buyers do due diligence to reduce risk; sellers go through due diligence to get the deal over the line smoothly and at the best price.

Why is due diligence necessary?

The purpose and benefits of a due diligence process for sellers and buyers

When does due diligence happen?

Due diligence usually starts once heads of terms have been signed and a confidentiality agreement is in place. It runs alongside negotiation of the main sale contract.

Most of the work is done in the early stages, because buyers want to identify issues that might affect warranties, indemnities, or even whether they proceed with the purchase at all.

For smaller SME transactions, due diligence may last a few weeks. For larger or more complex deals, it can run for months. The process is usually the most resource-intensive part of the transaction.

What does due diligence cover?

The scope varies depending on the size and nature of the business, but there are common areas that nearly every buyer will look at.

1. Legal due diligence

Ownership and structure: Who owns the shares or assets? Are there minority shareholders or restrictions in the company’s articles?
Contracts: Key customer, supplier, and finance agreements; unusual terms; change of control clauses that could be triggered by the sale.
Property: Whether the business owns or leases its premises; terms of occupation; any charges or restrictions.
Employment: Terms of contracts, notice periods, and key staff arrangements.
Regulatory consents: Licences and permits needed to operate.
Litigation and disputes: Ongoing claims or historic liabilities.

2. Financial and accounting due diligence

Historic performance: Are the accounts accurate and consistent with management information?
Assets and liabilities: Cash, debt, working capital, tax liabilities, and provisions.
Forecasts: Are forward-looking statements realistic?
Accounting policies: Do they follow accepted standards (UK GAAP or IFRS)?

3. Commercial due diligence

Market position: Customer concentration, supplier reliability, and competitive environment.
Business model: How the company makes money, and whether that model is sustainable.
Reputation: How the business is perceived in the market, including customer and employee satisfaction.

4. Specialist areas (when relevant)

Some businesses bring additional considerations. Depending on the sector, the buyer may need to involve specialist advisers in areas such as:

Intellectual property and IT systems.
Pensions and employee benefits.
Environmental compliance.
Data protection and GDPR.
Competition law and regulatory approvals.

Not every SME will need a deep dive in all these areas, but it’s important to know when to bring in experts.

How the due diligence process works

A typical due diligence process during a corporate sale

Buyer’s perspective: what to look out for

Be realistic about scope – Too much investigation can add cost and time. Focus on the areas that matter most for your deal.
Stay engaged – Don’t leave it entirely to advisers. You know your strategy and risk appetite; your input shapes what matters.
Act on findings – Due diligence isn’t just about collecting data. If risks are identified, decide whether to renegotiate, seek protection, or walk away.
Think ahead – The findings aren’t just for the transaction; they shape how you’ll run the business afterwards.

Seller’s perspective: how to prepare

Get organised early – Buyers expect quick access to up-to-date information. Having corporate records, contracts, and accounts in order before the process starts avoids stress later.
Anticipate questions – Think like a buyer. What would you want to see if you were acquiring the business?
Use advisers wisely – Your lawyers and accountants can help present information clearly and consistently. That reduces the risk of misunderstandings.
Maintain confidentiality – Sharing information is necessary, but sensitive data should only be released in controlled conditions.
Stay responsive – Unanswered questions can cause delays and undermine trust.

How due diligence affects valuation and deal structure

Due diligence doesn’t just uncover risks – it can directly affect the price and terms of a deal.

Conditions to completion
Certain risks may need to be resolved before completion (for example, a regulatory approval).
Price adjustments
If liabilities are found, the buyer may reduce their offer.
Earn-outs
Where future performance is uncertain, due diligence findings may push negotiations towards an earn-out (part of the price paid later, linked to performance).
Funding terms
Banks and investors may require specific issues to be addressed before releasing funds.

Managing due diligence effectively

For both sides:

Communication is key – Clear, timely responses prevent delays.
Agree timelines – Set realistic deadlines for providing and reviewing information.
Stay commercial – Remember the goal is to get the deal done, not to score points in the review process.
Balance thoroughness with pragmatism – Excessive detail may not add value but can slow things down.

The role of advisers

Lawyers typically lead the process, but accountants, tax advisers, and sector specialists all play a part. Their findings often feed directly into negotiation of the main contract. Choosing advisers who understand SME transactions and who can communicate clearly is essential.

Technology and trends in SME due diligence

The process has become increasingly digital. Some key developments include:

Virtual data rooms – Now the norm, offering secure access and version control.
AI-assisted review tools – Used by larger firms to scan contracts for unusual terms, though less common in smaller SME deals.
Standardised questionnaires – More buyers and advisers are using templates to streamline the process.
Focus on ESG and data protection – Environmental, social, and governance factors, plus GDPR compliance, are becoming more prominent.

For SMEs, technology helps reduce time and cost, but the fundamentals remain the same: clarity, organisation, and communication.

Common challenges

Vendor due diligence: should sellers go first?

Traditionally, due diligence is buyer-led. But increasingly, especially in competitive or auction-style sales, sellers choose to commission their own vendor due diligence (VDD) before bringing the business to market.

What is vendor due diligence?

VDD involves the seller engaging professional advisers (lawyers, accountants, or sector experts) to carry out a due diligence review in advance. The findings are then presented in a report that potential buyers can rely on or at least use as a starting point.

Benefits for sellers

Smoother process – By identifying issues early, sellers can fix them or prepare clear explanations before buyers raise questions.
Speed – Buyers can move faster because much of the groundwork is already done.
Level playing field – In an auction sale, all bidders see the same information, avoiding duplication and delay.
Credibility – A professional VDD report signals to the market that the business is organised and transparent.

Considerations

Cost – VDD is an upfront investment by the seller.
Scope – The seller decides what areas to cover; too narrow, and buyers may still commission their own checks.
Balance – VDD shouldn’t be “window dressing”. If material issues exist, they will be uncovered eventually. It is better to disclose them upfront with context than risk eroding trust later.

VDD can give sellers a real edge.

People and cultural aspects of due diligence

Financial figures and contracts tell part of the story, but in SMEs, the real value often lies in the people and culture. Buyers who ignore this risk problems after completion.

Why culture matters

Key staff retention – If the business depends on certain individuals, buyers need to know how secure those relationships are. Long notice periods, incentive schemes, or succession planning may need to be in place.
Owner dependency – In many owner-managed businesses, the seller is the face of the company. Buyers will ask: can the business survive without them?
Employee morale – A workforce that fears change may underperform or leave. Buyers may want to understand employee engagement, turnover, and HR practices.

What buyers should assess

Contracts – Are employment terms clear, consistent, and legally compliant?
Incentives – Are there bonus or share schemes that align staff with future performance?
HR systems – Are records up to date, with proper contracts, policies, and procedures?
Culture fit – Does the company’s way of working align with the buyer’s style? Differences here can derail integration.

What sellers can do

Show stability – Having signed contracts, clear policies, and documented appraisals demonstrates control.
Plan for transition – If the owner is stepping back, consider interim support or mentoring arrangements.
Be transparent – Hiding staff problems or disputes risks future claims. Being upfront builds trust.

For SMEs, people issues can make or break a deal. Treating them as part of due diligence, not an afterthought, is essential.

Conclusion

Due diligence is one of the most important phases of buying or selling a business.

For buyers, it’s the way to ensure you’re paying the right price and not inheriting hidden problems. For sellers, it’s the way to reassure the buyer and keep the deal moving towards completion.

Handled well, due diligence builds trust and reduces risk for everyone involved. Handled badly, it can lead to frustration, delay, or even collapse of the transaction.

If you’re preparing to sell or looking to buy, the key is to plan early, use the right advisers, and keep communication open. That way, due diligence becomes less of a hurdle and more of a step towards a successful outcome.

Next step

Buying or selling a business is a big step. Getting due diligence right can save you time, money, and stress. Whether you’re a buyer who wants to dig into the detail, or a seller who wants to present your business in the best light, our team can guide you through the process and keep your deal moving.

Get in touch with us today at 📩 info@orbitlegal.co.uk | 📞 0115 6777095 |

Disclaimer

This content is for general information only and doesn’t constitute legal, accounting, financial, or tax advice. It’s based on the law of England & Wales and was correct at the date of publication, but the law and guidance can change. Reading this page doesn’t create a solicitor–client relationship with Orbit Legal. Please take advice on your specific circumstances before acting. Get advice for your situation by contacting Orbit Legal at info@orbitlegal.co.uk or 0115 6777095.