Adam Brighouse, Corporate Finance Senior Manager discusses the emerging areas that due diligence teams are now focusing on and what this means for business owners planning a sale.
If you are considering selling your business, understanding what a buyer will scrutinise is essential.
Due diligence is the process through which potential acquirers investigate a target company before completing a transaction. Its purpose is straightforward:
- to verify financial performance
- assess risk, and
- confirm that the business is what it appears to be.
The outcomes of due diligence directly affect the price, the deal structure and, in some cases, whether the transaction proceeds at all.
The traditional priorities remain important, but acquirers are now expanding their work programmes into more specific areas.
If your business is not prepared for these questions, you risk late surprises and a weakened negotiating position.
1. FRS 102 Accounting Changes
The revised FRS 102 standard is changing the way operating leases are reported. Operating leases are now recognised on the balance sheet as right-of-use assets, which can have a material effect on EBITDA, net debt and gearing ratios.
Buyers will scrutinise restated financials closely and profit multiples may require adjustment. There is also a funding covenant risk as changes to reported figures may trigger breaches of existing lending agreements, so it is important to engage with your lenders early.
2. Effects of the Middle East Crisis
Global instability has caused ripple effects across UK businesses.
Energy costs, interest rate pressures and supply chain disruption are all interconnected challenges.
If your business relies on fixed energy contracts, acquirers will want to understand when those contracts expire and what your exposure looks like at market rates.
They will also examine the resilience of your supply chain, particularly if your supplier, or their supplier, depends on routes affected by disruption around the Strait of Hormuz.
Freight costs, logistics delays and supplier failures are all areas that due diligence teams will now probe in detail.
3. AI Impacts
Artificial intelligence is reshaping workforce planning, operational efficiency and competitive positioning across sectors.
Acquirers are increasingly asking how target businesses are using AI, whether they are exposed to AI-related disruption and how workforce changes may affect future earnings.
Deal and information platform MarktoMarket has noted that “AI-related workforce changes have contributed to buyer nervousness, which has fed through to valuations.” If your business has not considered its AI strategy, expect due diligence teams to raise it.
4. Sustainability and CSR
Environmental, social and governance considerations are no longer optional extras. Buyers, particularly PE-backed acquirers, now routinely assess a target company’s sustainability credentials and corporate social responsibility practices.
This may include carbon reporting if your company is large enough, supply chain ethics, workforce diversity and regulatory compliance with emerging ESG standards.
A clear, documented approach to sustainability strengthens your position. A gap in this area gives buyers a reason to negotiate the price down, as it will be a cost they will have to pay for.
5. Disaster Recovery Planning
The pandemic demonstrated how quickly unforeseen events can disrupt operations.
Acquirers now expect to see formal disaster recovery and business continuity plans.
They will want to know how your business would respond to a significant operational disruption, whether that is a cyber-attack, a supply chain failure or a natural event.
Systems resilience, data protection and the ability to maintain service delivery will all be examined.
Final Thoughts
These emerging themes sit alongside the priorities that have always driven due diligence – cash flow resilience, tax implications, stability of earnings, systems capability and the ability to scale. The difference today is that acquirers are digging deeper and broader than ever before. This is why unprepared deals are taking longer, but organised buyers shouldn’t expect any surprises.
If you are considering a sale, the best approach is to raise these issues early and if you haven’t considered them previously, address them with pragmatic fixes, rather than leaving them for a buyer to discover.
A well-prepared vendor due diligence pack and data room will answer buyers’ key questions before they are asked.
If you would like to discuss how we can assist you in preparing your business for sale, please email Adam Brighouse at [email protected] or speak to your usual contact at our office.
