Five tips for becoming diligence ready

Man examining company accounts

If you’ve thought of selling your business or expanding through acquisition then carrying out thorough diligence should be at the top of your priority list.

The diligence your advisers will speak of refers to a comprehensive and risk-based scope of work that they will carry out on your behalf typically relating to financial performance, tax and legal matters. There are of course many other areas (commercial, technological, management for example) that could be considered should you or your buyer think it worth the time and money.

In relation to financial diligence, we advise our clients that if they are looking to sell in the next three to five years they need to get their house in order now. The quality and reliability of management information within SMEs can vary considerably; financial diligence in particular would cover at least the last three historical financial years plus ideally a couple of year’s forecasts. Management’s forecasting accuracy would be evaluated based on past budgeting capabilities (i.e. how close your budget was to actual performance).

You might have started to get an idea as to how much work might be involved now but have you considered the following five tips?

1. Failing to prepare is preparing to fail

Trite as the saying maybe, it is a good summary of what you need to do to get ready for diligence early on. A SME is typically run by an owner/manager who will be aware of what’s going on in their company without the need for masses of data. However, the new owner will need more than your word for how the company is performing.

2. Get your story straight

A business will go through periods of profitability dips and peaks. It doesn’t have to be all rainbows and unicorns before your company can be sold but you should have a robust story to support the numbers you’re reporting. Any one-off expenses or income in a given period should be monitored so your profits can be adjusted to reflect the true earning potential of your company.

3. Data rooms are a must

Embrace technology. There are a number of providers of data rooms. Some better than others. Simple consumer file-sharing sites should be avoided for security and tracking reasons. Within your own deal team, you should utilise rights management to monitor access to documents by individuals and advisers, and most importantly to segment information on a need-to-know basis. Rights management can help reduce exposure, especially around IP issues, should a deal fall through. A reputable provider is money well spent.

4. Establish materiality

Even with articulated diligence goals and information requests, it is easy to become overwhelmed in a large data room with hundreds of contracts and spreadsheets. You should establish materiality thresholds for individual agreements and areas of exposure. Every last penny need not be accounted for. By having clear materiality thresholds, your team can focus their efforts where risk and opportunity are the largest.

5. Use your advisers

Your corporate finance advisers will give you a steer in terms of what you need to do to get your company ready for sale (and therefore for diligence). Tap into this resource because they will have dealt with enough transactions to know what you should be focusing on.

Preparing for diligence should add value to your business and not be a distraction.Even if your strategy were to change and a sale was no longer viable, preparing for diligence will have made your company stronger with a finance function that is reactive to market changes and able to provide management with the information they need to grow the company.


Lake Falconer

Corporate Finance Partner
Lake leads the PEM Corporate Finance team on MBO, acquisition, disposal, succession and strategic planning. He also heads up PEM’s valuation team providing business valuations for shareholder exits, disputes, business planning and regulation. Lake has over 30 years' senior level experience as a business adviser and as a manager in industry. He holds the ICAEW corporate finance qualification.