Before you agree to buy a business, it is essential to carry out due diligence. This means carefully checking the facts and risks so that you can make an informed decision. Here is a basic checklist to guide you through the process.
1. Review financial records
Ask for at least three years’ worth of accounts, including profit and loss statements, balance sheets, and tax returns. Make sure the figures are consistent and professionally prepared. Check for signs of financial difficulty, falling profits, or unusual expenses.
2. Check VAT, PAYE and tax compliance
Request confirmation that the business is up to date with VAT, PAYE, Corporation Tax and Self-Assessment filings. Ask to see HMRC correspondence and payment records to ensure there are no outstanding liabilities.
3. Look at cash flow and working capital
A profitable business may still have cash flow issues. Review recent bank statements, aged debtor and creditor reports, and understand how money flows in and out of the business.
4. Understand what is being sold
Clarify what you are buying – assets, goodwill, stock, customer lists, contracts, premises, or an entire company. Make sure the seller has legal ownership of these and that contracts can be transferred.
5. Review key contracts and agreements
Look at customer contracts, supplier terms, leases, loans, and employee contracts. Check for clauses that may affect your ability to continue trading in the same way after purchase.
6. Investigate legal matters
Ask if there are any ongoing legal disputes, unpaid claims, or employment issues. You may need a solicitor to help you with this part of the due diligence.
7. Assess staff arrangements
Find out how many staff are employed, what their roles are, and what their terms and conditions include. You may need to honour these under TUPE regulations.
8. Review systems and processes
Check whether the business has good systems for bookkeeping, payroll, compliance, and customer management. Poor systems may mean extra costs after purchase.
Final advice
Proper due diligence helps protect you from future problems and ensures you are paying a fair price.
Always work with your accountant and solicitor when buying a business.
