Due diligence is not only about confirming the data the seller has provided. The buyer checks whether the company can safely continue after the change of ownership, and whether the assumptions behind the offer still hold.
1. Inconsistent financial data
Differences between the statutory accounts, management reports, tax returns and the investor presentation need explaining. Without a quick reconciliation, confidence in the numbers weakens.
2. Aggressive EBITDA adjustments
Adjustments should cover genuinely one-off events or non-market costs, and they should be well documented. Excluding recurring costs does not raise sustainable profitability.
3. Customer or supplier concentration
A large share of one counterparty means that losing the relationship could change the result materially. The investor will check contract terms, the history of the relationship and the availability of alternatives.
4. Dependence on the owner
If the owner is responsible for sales, relationships, operating decisions and technical knowledge all at once, the buyer may conclude that it is buying a business that depends on one person rather than a self-standing organisation.
5. Verbal agreements and informal arrangements
Missing written contracts, change-of-control clauses or short termination periods increase the risk of losing relationships after the change of ownership.
6. Unresolved ownership rights
The brand, domains, software, technical documentation and designs should belong to the company being sold. Rights held by the owner, an employee or a contractor need to be transferred.
7. Related-party transactions
Rent paid for the owner’s property, shareholder loans, shared costs or sales between related companies must be documented and brought to market terms.
8. Disputes and undisclosed liabilities
Claims by customers, employees, tax authorities or regulators can lead to a retention from the price, escrow, additional warranties and specific indemnities.
9. Weak management reporting
Without margin data by product, customer or channel, it is hard to confirm where the profit comes from. The buyer may then apply more cautious assumptions.
10. Unclear working capital and net debt
Seasonality, slow-moving stock, overdue receivables, leases and debt-like liabilities can significantly change the amount the owner receives at closing.
“An issue disclosed early can be explained or reflected in the deal structure. An issue discovered late also becomes an issue of trust.”
How might the investor respond?
- lower the value or the multiple,
- change the definition of debt or working capital,
- defer part of the price or introduce an earn-out,
- ask for escrow, warranties or a specific indemnity,
- make closing conditional on fixing the issue,
- withdraw from the process.
How to prepare the company
Before the data room opens, it is worth running a financial, tax, legal, commercial and organisational review from the buyer’s perspective. The goal is not to hide weaknesses but to identify them early, put the documents in order and prepare a consistent explanation.
What will the investor discover in the first weeks of due diligence, and will they hear about it from the seller first?
Polish version: 10 czerwonych flag w due diligence