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Buying a business

Due diligence when buying a business: five things your lender will check

Due diligence when buying a business also builds the evidence your lender needs. The five areas it checks, and the gaps that slow a decision down.

Reading time 5 min read
Category Business guides
Written by The bizbritain team
Due diligence when buying a business is the check you run before you commit. It tells you what you are really buying. If you are borrowing to buy, your lender will want to see much of the same evidence before it agrees to fund the deal. Gather it early and the lender can decide sooner.
This guide sets out the five areas a buyer checks, what each one tells a lender, and what tends to slow things down.

Section 01

What is financial due diligence, and why does the lender start there?

Financial due diligence is a close look at the numbers of the business you want to buy. It covers the accounts, the cash flow, the debts and the tax position.
A lender starts here for a simple reason. The business you buy will repay the loan. So the lender needs to see that its profits can cover the repayments, with room to spare.
According to the British Business Bank's due diligence checklist, the financial review can include:
  • Company accounts and statements, including cash flow and profit and loss.
  • Annual reports and projections for future performance.
  • Expenses, debt, collateral and equity.
  • Payroll and VAT statements.
  • Tax liabilities.
Once you buy a business, you become responsible for its problems. That includes debts, tax bills and legal claims. A lender will want to know about them before you do the deal, not after.

Section 02

Five things your lender will check

The British Business Bank groups due diligence into a few key areas. Here is what each one means for a loan to buy the business.

  1. The finances

    Accounts, cash flow, debts and tax. This shows whether the business can carry the new borrowing.

  2. The legal pack

    Customer and supplier contracts, property, insurance, licences and any legal claims. A key contract that ends when the owner leaves can change the whole deal.

  3. How the business runs

    Sales, suppliers, pricing, systems and complaints. This tells a lender whether the income is likely to continue under a new owner.

  4. The assets

    Property, equipment and intellectual property. Some lenders will secure the loan against these, so they need to know what is there and who owns it.

  5. The people

    Contracts, salaries, pensions and any staff claims. Key staff leaving can hit the profits the loan depends on.

You do not have to do all of this alone. The British Business Bank suggests help from your accountant on the finances and your solicitor on the legal side.

Section 03

What slows down due diligence when buying a business?

Most delays come from gaps in the evidence. Here are the common ones.
  • Accounts that are out of date, or that do not match the bank statements.
  • A tax bill or a debt that comes to light late.
  • Key contracts that the seller has not shared yet.
  • No clear answer on which staff and which assets come with the business.
Each gap sends the lender back to you with more questions. Each question adds days or weeks.
So ask the seller for the full pack as soon as the price is agreed in principle. If the seller will not share it, that is useful information too.

Section 04

How to take the deal to a lender

Due diligence also feeds the price you offer. If the checks turn up a problem, you may want to pay less or change the deal. Our guide on how to value a business you want to buy explains what a lender will actually fund.
How you buy matters as well. Buying the company's shares means you take on its history. Buying only its assets can leave some of that behind. Our guide to asset sale or share sale covers what changes for the funding.
When your evidence is ready, an acquisition finance broker can take the deal to lenders that fund business purchases. A good pack helps the deal land with the right lender first time.

This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.

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