Due Diligence: What Actually Happens After You Sign the Letter of Intent

The 30-Second Definition

Due diligence is the formal investigation process conducted by a buyer — and their legal, financial, and commercial advisors — between the signing of a Letter of Intent and the execution of the Share Purchase Agreement. Its purpose is to verify the accuracy of everything the seller has represented about the business, identify risks that were not disclosed in the Information Memorandum, and provide the factual basis on which the buyer's final offer — and deal structure — is determined. For the seller, due diligence is the period of maximum exposure and minimum leverage. Understanding what it involves and how to manage it is not optional — it is the difference between a clean transaction and a renegotiated one.

The Four Workstreams

Due diligence in a mid-market UK transaction runs across four parallel workstreams, each conducted by a different advisory team and each generating its own findings report.

Financial Due Diligence is led by the buyer's accountants — typically a Big Four or mid-tier firm — and focuses on verifying the historical financial performance of the business. The core output is the Quality of Earnings report, which tests the sustainability and accuracy of the Adjusted EBITDA, challenges every line item in the EBITDA Bridge, examines the working capital cycle, and stress-tests the balance sheet. Financial due diligence is the workstream most likely to generate a valuation adjustment. Any discrepancy between the figures presented in the IM and the underlying accounting records — however minor — will be escalated as a point of concern and potentially used as a basis for price renegotiation.

Legal Due Diligence is led by the buyer's solicitors and covers the entirety of the business's legal position: corporate structure and share ownership, material contracts and their change-of-control provisions, intellectual property ownership and registration, employment contracts and any outstanding tribunal claims, property leases and dilapidations exposure, regulatory licences and their transferability, and the company's litigation history. Legal due diligence generates a report that feeds directly into the Warranty and Indemnity framework of the SPA — every risk identified becomes either a warranty negotiation point, a specific indemnity demand, or a condition precedent to completion.

Commercial Due Diligence is conducted either by the buyer's corporate finance team or by an independent commercial advisory firm, and focuses on the external market position of the business: the size and growth rate of the addressable market, the sustainability of the customer base (including concentration risk), the competitive landscape, the pricing power of the business, and the credibility of any growth projections presented in the IM. In PE transactions, commercial due diligence frequently involves direct conversations with the business's customers — reference calls conducted without the seller present — to test whether the customer relationships are as described.

Management and Operational Due Diligence involves a structured assessment of the senior team's capability and the operational infrastructure of the business. This workstream examines whether the management team is capable of delivering the post-acquisition plan, how dependent the business is on the founder, the quality of the IT systems, and the robustness of the financial reporting infrastructure. Management due diligence often includes formal presentations by the senior team to the buyer's investment committee — the Management Presentation — which is both an assessment exercise and an opportunity for the management team to make the case for the business independently of the founder.

The Timeline

Due diligence in a mid-market UK transaction typically runs for eight to twelve weeks from the signing of the Letter of Intent to the execution of the SPA, though complex transactions or poorly organised data rooms can extend this significantly. The process follows a broadly consistent sequence.

Weeks one and two are dominated by document request lists — typically a hundred or more items submitted by the buyer's legal and financial advisors — and the seller's effort to populate the Virtual Data Room comprehensively. The speed and completeness of the seller's initial responses sets the tone for the entire process. A seller who responds to requests quickly and completely signals operational control. A seller who is slow, incomplete, or disorganised signals exactly the type of risk the buyer is looking for.

Weeks three to six involve the detailed review of the documents uploaded to the data room, follow-up questions on items that require clarification, and the Management Presentation — typically a half-day session in which the senior team presents the business to the buyer's team and investment committee. The Management Presentation is one of the highest-leverage events in the entire transaction and should be rehearsed in advance with the same rigour as a board presentation to an institutional investor.

Weeks seven to ten involve the production of due diligence reports by the buyer's advisors, the identification of key issues requiring resolution, and the negotiation of the SPA based on the findings. Issues identified in due diligence are categorised as deal-breakers (rare), price adjustment items (common), or warranty and indemnity points (standard). Each category requires a different response from the seller's advisors.

How Due Diligence Findings Are Used Against the Seller

The due diligence process is not a neutral information-gathering exercise. It is a structured search for grounds on which to renegotiate the economics of the transaction. Every finding — however minor — is assessed for its potential as a price chip, a deal structure adjustment, or a warranty claim. Understanding this is not cynical; it is the commercially accurate characterisation of how experienced acquirers and their advisors operate.

The most effective protection against due diligence renegotiation is the Vendor Due Diligence approach: commissioning your own financial and legal due diligence reports in advance of going to market, identifying every issue before the buyer does, resolving what can be resolved, and disclosing what cannot be resolved in the Information Memorandum and the Disclosure Schedules. A seller who has already answered every question the buyer's advisors are likely to ask — and can demonstrate clean, consistent financial records to support those answers — removes the primary mechanism through which experienced buyers restructure transactions in their favour during the exclusivity period.

Managing the Process Without Losing Momentum

Deal fatigue is real. The due diligence period is operationally demanding, emotionally draining, and commercially distracting. Founders who are simultaneously running the business, managing the transaction, and responding to hundreds of document requests frequently make poor decisions — accepting unfavourable terms simply to bring the process to an end.

The operational principle that protects against deal fatigue is preparation. A business that has maintained a live, well-organised Virtual Data Room for twelve months before going to market, that has clean management accounts reconciled to statutory filings, and that has resolved its key contractual and legal risks in advance can move through due diligence at pace. A business that has done none of this preparation will find the process exhausting, slow, and expensive — and will reach the SPA negotiation in a weakened position.