Budget 2026: what it means for you and your business —

Financial Due Diligence

In short

Financial due diligence is an independent examination of a target company’s financial position before you commit — earnings quality, working capital, debt and debt-like items, tax exposures and key risks. It gives you an evidence base to renegotiate the price, restructure the deal, or walk away. For sellers, vendor due diligence finds and fixes the problems before a buyer uses them against you.

Due diligence is not a box-ticking exercise for the bank. It is the only stage of a transaction at which you can still change your mind cheaply — and the last point at which the information asymmetry between buyer and seller can be corrected.

What does financial due diligence actually examine?

Quality of earnings. Are the profits real, sustainable and repeatable? Sellers present adjusted EBITDA with add-backs that flatter it. We strip those back and test what the business will genuinely earn for you.

Working capital. How much cash does the business need just to keep running? Getting the working capital target wrong in the deal is one of the most common and expensive errors — buyers routinely find they must inject cash on day one.

Debt and debt-like items. Not just the loans — also finance leases, unpaid tax, deferred consideration on past deals, dilapidations, unfunded pensions. Anything that behaves like debt reduces what the equity is worth.

Tax exposures. Historic positions the buyer would inherit on a share purchase.

Customer, supplier and revenue analysis — concentration, churn, contract terms.

What is vendor due diligence, and do I need it?

It is diligence you commission on your own business before going to market.

It does two things. It finds the problems before the buyer does — so you can fix them, or at least prepare an answer, rather than being ambushed mid-process. And it speeds up the deal, because a buyer working from a credible vendor report has less to discover.

Both protect the price. A buyer who discovers a problem uses it to renegotiate; a buyer who is told about a problem up front, with the fix already in hand, usually doesn’t.

What typically gets found?

In our experience, the recurring findings are:

Owner remuneration and personal expenses running through the business. Working capital that has been squeezed to flatter the cash position before a sale. Revenue recognised early, or one-off revenue presented as recurring. Customer concentration understated in the information memorandum. Unrecorded liabilities — accrued holiday, dilapidations, tax positions. Related-party transactions on non-commercial terms.

None of these necessarily kills a deal. All of them change the price.

The cheapest time to discover a problem is before you own it

Due diligence costs a fraction of the purchase price, and it is the last point at which you can still walk away for the cost of the fees. The most expensive diligence is the one you decided to skip.

On this page

Why LMJ Group

We know what sellers leave out — because we act on both sides of deals.

Working capital done properly — the most common and expensive thing buyers get wrong.

Vendor DD too — find and fix your own problems before a buyer prices them in.

Findings you can negotiate with — evidence, not opinions.

Chartered (ICAEW) and independent.

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Frequently asked questions

What is a quality of earnings report?

An assessment of whether a target's reported profits are real, sustainable and repeatable — stripping back the add-backs and adjustments sellers use to flatter EBITDA. It's the core of financial due diligence, and it's frequently where the price gets renegotiated.

Why does working capital matter so much in a deal?

Because it determines how much cash you'll need to inject the day after completion. Sellers often squeeze working capital before a sale to flatter the cash position. Getting the working capital target wrong is one of the most common and expensive errors buyers make.

Should I commission vendor due diligence before selling?

If the business is of any size, yes. It finds the problems before a buyer does — so you fix them rather than being ambushed — and it speeds up the process. A buyer who discovers a problem renegotiates; a buyer who is told about it up front, with a fix in hand, usually doesn't.

How long does due diligence take?

Typically three to six weeks for a straightforward SME acquisition, depending on the quality of the target's records and how responsive they are. Poor records lengthen it considerably — which is itself a finding worth knowing about.

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This page provides general information about the 2026/27 UK tax year and is not advice on your particular circumstances. Tax and regulatory rules change frequently. Please contact us before acting, or refraining from acting, on anything set out here. LMJ Group is a firm of Chartered Accountants regulated by the ICAEW. LMJ Group is not a registered auditor and does not provide audit services. Last reviewed: July 2026.