3 min read
Understand what due diligence will cover
Due diligence for a commercial lender focuses primarily on financial position, cash flow, security and repayment capacity. For an investor or acquirer, it extends to legal ownership, contracts, staff arrangements, IP and operational risks. The scope will be set out in a heads of terms or term sheet — read it carefully and ask for clarification on anything ambiguous before the process begins.
Even if the counterparty sends a generic checklist, they will follow up on anything unusual. Your job is not to paper over gaps but to identify them early and address them or be ready to explain them clearly.
Organise your financial records first
Gather statutory accounts for the last three years, management accounts for the current year-to-date, and your most recent VAT returns. If your management accounts are not produced monthly or are not reconciled to the bank, fix that before the process starts — gaps in management reporting are a common red flag that causes delays.
Be ready to provide a debtor aging report, creditor aging report, bank statements for at least six months, and a rolling 13-week cash-flow forecast. If any of these do not exist in your business in their current form, their absence is itself a finding that will slow or complicate the process.
Get your legal house in order
Locate your certificate of incorporation, memorandum and articles of association, shareholders' agreement (if any) and any existing charge or debenture registered at Companies House. Confirm that the company's registered address and director details on Companies House are current — discrepancies cause unnecessary friction.
Review your key commercial contracts. Do they contain change-of-control clauses that would be triggered by a transaction? Are any contracts verbal rather than written? Are there outstanding disputes, county court judgments or regulatory notifications that you have not yet disclosed? Surface all of this proactively rather than waiting for it to be discovered.
Build a data room
A data room is simply a structured, access-controlled repository of documents. For smaller transactions a shared folder with clear naming conventions works fine. Organise it by category: financials, legal, corporate, people, property, contracts, IP. Number each document and maintain a contents list.
Avoid the temptation to include everything indiscriminately. A data room stuffed with irrelevant documents signals poor organisation. A tidy data room with clear labels signals a well-run business — which is itself a positive signal to a lender or investor.
Prepare your management team
Due diligence often involves interviews with key personnel beyond the CEO or finance director. Prepare your operations director, head of sales or technical lead for questions about their function — what their team does, how decisions are made, what the key risks are in their area. Inconsistent answers between management team members create doubt even where none is warranted.
Brief your team on confidentiality. Until a transaction completes, the process should not be visible to the wider workforce, customers or suppliers. Leaks can destabilise relationships and complicate the transaction.
Frequently asked questions
What is the most common reason SME due diligence processes stall?
Missing or inconsistent financial records are the most frequent cause of delays. Management accounts that do not reconcile to statutory filings, gaps in VAT returns, or a debtor book that cannot be evidenced are all common friction points that extend timelines significantly.
Do we need a solicitor for the due diligence process?
For a commercial lending transaction, a solicitor is typically engaged to handle the legal due diligence and security documentation. For an investment or acquisition, independent legal advice is strongly recommended. This is a matter for your professional advisers — confirm the scope with them early.
Funding for UK limited companies
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