Transaction readiness – preparing for an exit starts years before sale

The first two diligence areas – financial (including tax) and legal - are two of the most fundamental ones for any transaction and many business owners will likely see the most scrutiny applied here.

Financial

Financial due diligence focuses on both the historical and forecast performance of the business, as well as its quality of earnings.

Establishing robust financial systems and processes from an early stage helps to build financial discipline. The implementation of a professional accounting system and controls will ensure financials are documented in a systematic manner from the start. Solid evidence of past performance, including management accounts that tie to statutory accounts and detailed account breakdowns (e.g. aged receivables listing, fixed asset register, revenue breakdowns etc.), instils trust in the business’ underlying fundamentals and business model. 

Forecasts play a pivotal role in shaping valuation expectations. They need to strike the right balance between ambitious and achievable, as buyers may base their valuation on an outturn of current earnings or the future earnings potential of the business. Having credible, data-backed assumptions behind revenue and cost projections (e.g. pipeline visibility, hiring plans etc.) and preparing a fully integrated 3-Statement Model to demonstrate the assumptions, will substantiate the growth story and excite prospective buyers. 

Valuations for most mature businesses (sector-dependent) are typically based on a multiple of an adjusted EBITDA, which reflects the typical current or future trading performance of the business. Quality of earnings analysis will scrutinise proposed adjustments (e.g. excessive salaries for management, market-level rent, division set-up costs, restructuring costs etc.) with subjective items often being challenged during diligence. Engaging an experienced corporate finance advisor to validate the rationale and calculations behind these adjustments is essential.

A key sub-stream of financial diligence is tax diligence, often carried out by tax specialist teams. There are some common pitfalls we’ve come across in M&A processes, which may result in a price chip later in the process. These include undisclosed tax liabilities and penalties, exposure to foreign tax issues, and lack of knowledge about tax losses and tax credits being usable in the company structure post-transaction. It is advisable to have a dedicated tax expert reviewing all compliance measures from early stages of the business.

Legal

One of the most critical, and often time consuming, stages in a transaction is legal due diligence. The lawyers analyse every aspect of the business, including the following (which is by no means an exhaustive list):

• Corporate structure and governance documents (e.g. articles of incorporation, shareholder agreements, board minutes etc.) 
• Material supplier and customer contracts
• Loan agreements, debt terms, and credit facilities
• Intellectual property
• Employment matters (e.g. management team contracts, compliance with labour laws, employee benefit schemes etc.) 
• Real estate - property ownership / rental agreements
• Any ongoing or prior litigation
• Compliance with GDPR and other cybersecurity laws

While business owners are rightly focused on growth and operations, legal and regulatory housekeeping is sometimes neglected. Over time, this can result in administrative oversights - inaccurate or outdated filings, such as Companies House records, are common issues that, while not necessarily deal-breakers, can raise doubts, cause delays, and introduce unnecessary friction during a sale process. For example, Enterprise Management Incentives options schemes written incorrectly or share buybacks being invalid can cause a genuine hit to the valuation or give rise to obstacles in getting the deal over the line.

For businesses operating in highly regulated sectors (e.g. healthcare, financial services), heightened scrutiny is the norm, making proactive legal preparation even more important. Regulatory bodies often have stringent compliance requirements, and buyers will expect clear documentation showing all conditions have been met.

Beyond the diligence phase, the final hurdle in pushing a deal over the line is usually getting through the legals. Successfully negotiating favourable deal terms in the sale & purchase agreement (SPA), limiting warranties and indemnities to the extent possible, and skilfully manoeuvring discussions around disclosures is critical to protect the seller’s position and maximise the value they’ll realise from the transaction: Appointing the right lawyers for your business is key.

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