Due Diligence UK: Company Sale & Acquisition Guide

Overview

Due diligence is the structured investigation a buyer carries out into a target company before agreeing to buy its shares or its business and assets. The aim is straightforward: find out what the buyer is really getting, flag anything that might reduce the value of the deal, and work out what protections need to go into the sale and purchase agreement.

It usually runs in parallel with commercial negotiations, once heads of terms have been signed. In a typical share sale, the buyer's advisers will request a large volume of information covering corporate structure, finances, contracts, property, staff, tax, intellectual property, data protection, regulatory compliance and any ongoing disputes.

The seller loads the material into a data room, and the buyer's legal, financial and commercial advisers review it and raise follow-up questions. The findings feed directly into pricing, warranties, indemnities, and sometimes into whether the deal proceeds at all.

Done well, it gives the buyer confidence and gives the seller a clean exit. Done badly, it creates arguments years later.

Key steps

1. Agree heads of terms and a non-disclosure agreement. Before any sensitive information is shared, the parties sign an NDA and usually a heads of terms document setting out the headline price, structure and key conditions. This framework gives both sides comfort that confidential financial and operational data can be disclosed safely while exclusive negotiations continue.
2. Scope the due diligence exercise. The buyer's advisers prepare an information request list covering legal, financial, tax and commercial matters. The scope should reflect the size of the deal and the sector involved, so a regulated financial services target will need far deeper regulatory review than a small trading company, and scope creep needs to be managed carefully.
3. Populate the data room and respond to enquiries. The seller uploads corporate records, contracts, accounts, employment files, property documents, IP registers and regulatory correspondence into a secure online data room. The buyer's team reviews the material, raises written questions, and the seller provides written responses that often become part of the disclosure against warranties.
4. Produce due diligence reports and identify red flags. Legal and financial advisers prepare written reports for the buyer, summarising key risks such as change of control clauses, tax exposures, unresolved litigation, missing consents, or gaps in title to assets. Serious issues may lead to price reductions, specific indemnities, or in some cases the buyer walking away.
5. Feed findings into the sale and purchase agreement. The outcome of due diligence shapes the final SPA, including the warranty schedule, indemnities, completion conditions, and the disclosure letter. Where risks cannot be priced or insured, the parties may use retention accounts, earn-outs, or W&I insurance to allocate risk between buyer and seller.

Common questions