Due Diligence in Business Lending and Acquisitions

What due diligence covers

Due diligence is the investigative process through which a lender or buyer seeks to verify that the information presented to them is accurate and that there are no material undisclosed risks. The scope varies by transaction but typically encompasses three core workstreams:

• Financial DD: Historical accounts, management accounts, cashflow forecasts, quality of earnings, working capital normalisation, and debt/pension positions.
• Legal DD: Corporate structure, title to assets, contracts, litigation, IP ownership, regulatory compliance, and employment matters.
• Commercial DD: Market position, competitive dynamics, customer concentration, supplier dependencies, and growth assumptions.

Due diligence in a lending context

For business lending, a lender's due diligence is less comprehensive than full M&A diligence but still substantive. The lender will typically review audited accounts, management accounts, borrowing base information, covenant compliance history, and the specific purpose of the facility. Asset-based lenders will also conduct appraisals of the collateral — property valuations, stock audits, or debtor verification.

The cost of due diligence is usually borne by the borrower as part of the facility's arrangement process. This is standard commercial practice, not a negotiating point, for most lending transactions.

Preparing for due diligence

Directors can significantly speed up the process by maintaining an organised data room with up-to-date financial statements, board minutes, material contracts, corporate structure charts, and regulatory correspondence. Gaps or inconsistencies discovered mid-process create delays, increase costs, and can raise lender or buyer concern about management competence.

Identify and disclose known issues proactively. Undisclosed problems discovered post-completion or post-drawdown can lead to warranty claims, indemnity calls, or — in serious cases — allegations of misrepresentation. Take legal advice on your disclosure obligations before the process begins.