Helping Clients Prepare for Sale or Investment Due Diligence
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Introduction
When a business owner wants to sell their company, or when an investor wants to put money into a business, both sides need to be sure that the business is what it says it is. This checking process is called due diligence. Think of it like a deep inspection of a house before someone buys it. The buyer wants to look in every room, check the roof, test the taps, and make sure there are no hidden problems.
Due diligence can be stressful for the seller. Buyers ask for many documents, ask hard questions, and sometimes find problems that lower the price or kill the deal. This is why preparing well in advance is so important. As a practitioner, your job is to help the client get ready, walk with them through the process, and make sure nothing goes wrong because of poor records or missing information.
This article explains what due diligence is, what your client must do, what to look out for, what can go wrong, and which professional standards apply, especially when you are asked to perform agreed-upon procedures.
What Is Due Diligence?
Due diligence is the homework a buyer or investor does before they sign a deal. They want to check the facts of the business so they know exactly what they are buying or putting money into. There are different types of due diligence, and a serious deal usually involves more than one of them at the same time.
Financial due diligence — checks if the numbers in the financial statements are real, if the profits are sustainable, and if there are any hidden debts.
Tax due diligence — checks if all taxes have been paid correctly and if there are any tax risks.
Legal due diligence — checks contracts, licences, court cases, and ownership of assets.
Operational due diligence — checks how the business actually runs day to day, the staff, the systems, and the suppliers.
Commercial due diligence — checks the market, the customers, and the competitors.
Your client will often need help with all of these, but the financial and tax parts are usually where accountants and auditors play the biggest role.
Helping the Client Get Ready
The best deals are the ones where the seller is well prepared. A client who walks into due diligence with messy records will lose value, lose time, and may even lose the deal. Here is what you must help them do.
1. Clean Up the Financial Records
Make sure the books are up to date and accurate. All the bank accounts must be reconciled. All the invoices must be matched to payments. Old or unusual items sitting on the balance sheet must be sorted out. If the financial statements have not been audited or reviewed, consider whether this should be done before the deal starts. A buyer will trust audited numbers far more than numbers from a spreadsheet.
2. Build a Data Room
A data room is just a safe online folder where all the important documents are kept. The buyer and their advisors are given access to it during the deal. A well organised data room saves a lot of time and shows the buyer that the business is run properly. Help your client put the documents into clear folders, with proper names, so nothing is lost or repeated.
Documents that usually go in the data room include:
• Last three to five years of financial statements.
• Management accounts for the current year.
• Tax returns and proof that taxes were paid.
• All major contracts (customers, suppliers, leases, loans).
• Company registration documents and shareholder details.
• Employment contracts and a list of staff.
• Licences, permits, and any regulatory approvals.
• Details of any court cases or disputes, even small ones.
• Insurance policies.
• Lists of assets and where they are kept.
3. Prepare a Vendor Due Diligence Report (Optional but Useful)
Sometimes the seller does their own due diligence first and gives the report to the buyer. This is called vendor due diligence. It can speed up the deal and helps the seller find and fix problems before the buyer finds them. If you do this for your client, be honest. Do not hide problems. Buyers will find them anyway, and trust will break.
4. Coach the Client on What to Say
Buyers will ask the client direct questions, sometimes in meetings. Help the client prepare clear, honest answers. Tell them not to guess. If they do not know an answer, they should say so and come back later with the right information. A wrong answer in due diligence can be treated as a misrepresentation, which is a serious legal problem.
What to Look Out For
As the practitioner helping the client, your eyes must be wide open. There are common problem areas that come up again and again in deals. If you spot them early, you save the client a lot of trouble.
• Revenue that is not real. Some businesses record sales that have not actually happened, or count income twice. Buyers will dig into this and a small problem can destroy trust in the whole business.
One-off profits dressed up as normal. If the business made a big once-off sale or got a government grant, this should not be shown as if it is a normal yearly profit.
Hidden debts. Loans from family, unpaid suppliers, or guarantees the business has signed for other parties must all come out. A buyer that finds a hidden debt later will pull the deal.
Tax problems. Late returns, unpaid VAT, or PAYE that has not been declared properly are common. SARS or any tax authority will not forget these, and the new owner will inherit them.
Customer concentration. If one customer brings in most of the income, the buyer will be worried. Help the client explain this risk and show how it is managed.
Related party transactions. Deals between the business and the owner, or family members, must be at fair prices and properly disclosed. Hidden related party deals are a red flag.
Weak contracts. If the business has key customers or suppliers but no signed contracts, the buyer cannot be sure the relationships will continue. Get contracts in order before the deal starts.
Staff and labour issues. Unfair dismissal cases, unpaid leave, or workers who were classified as contractors when they should be employees are all common problems.
Assets that are not really owned. Cars, machinery, or property that is on the books but actually belongs to someone else, or is on a loan, must be made clear.
What Can Go Wrong
Even with good preparation, deals can fall apart. Here are the most common things that go wrong, so you and your client can avoid them.
Price chipping. The buyer uses every small problem they find to push the price down. If the seller is not prepared, they cannot defend their numbers.
Delays. If documents are missing or take too long to find, the deal slows down. Sometimes the buyer just walks away because they lose interest.
Loss of trust. If the buyer finds something the seller did not disclose, even a small thing, they start to wonder what else is hidden. Trust is hard to rebuild.
Leaks. If staff, customers, or competitors find out about the deal too early, it can damage the business. Keep due diligence confidential and use non-disclosure agreements.
Tax surprises. A poorly planned sale can lead to a much bigger tax bill than expected. Get tax advice early, before the structure of the deal is fixed.
Warranties and indemnities. These are promises the seller makes about the business in the sale agreement. If the seller signs broad warranties without thinking, they may have to pay money back to the buyer years later. Read every warranty carefully.
Earn-out disputes. Sometimes part of the price is paid only if the business hits certain targets after the sale. These targets must be written very clearly. Many disputes happen here.
Professional Standards That Apply
When you help a client with due diligence, you may be giving advice, doing investigation work, or performing agreed-upon procedures for a specific purpose. The work you do must follow the right professional standards. Knowing which standard applies tells you what you can and cannot say in your report.
Agreed-Upon Procedures: ISRS 4400 (Revised)
The most important standard in this area is the International Standard on Related Services 4400 (Revised), called Agreed-Upon Procedures Engagements. It is issued by the International Auditing and Assurance Standards Board (IAASB) and applies to engagements where the terms were agreed on or after 1 January 2022.
In simple words, an agreed-upon procedures engagement, or AUP, is when you and the client agree on exactly what checks you will do. You then do those checks and report what you found. You do not give an opinion. You do not say the financial statements are correct. You only report the facts of what you saw. The buyer or investor then makes up their own mind based on your findings.
Some important things to know about ISRS 4400 (Revised):
It is not an audit and not a review. You are not giving any assurance. The user of the report must draw their own conclusions from the findings.
Findings must be factual. A finding is something that can be checked by someone else doing the same procedure. If two practitioners do the same work, they should get the same result.
Professional judgement is required. You must use your judgement when accepting the engagement, doing the work, and writing the report. If the procedures the client wants are not suitable for the purpose of the engagement, you must decline.
Engagement letter is a must. Before you start, you and the client must agree in writing on the purpose, the procedures, the report format, and who will use the report.
Independence. Independence is not always required, but if you are not independent, this must be stated in the report. The standard now also requires you to follow ethical requirements.
Documentation. You must keep proper records of the procedures performed and the findings. This protects you if the engagement is challenged later.
Other Standards That May Apply
ISA (International Standards on Auditing) — if the client also needs an audit before the sale, the audit work follows the ISAs.
ISRE 2400 — for review engagements, where you give limited assurance on financial statements.
ISAE 3000 — for assurance engagements other than audits or reviews, sometimes used for things like prospective financial information.
Code of Ethics for Professional Accountants — always applies, no matter what type of engagement you are doing.
Local laws and regulations — tax law, companies law, exchange control, and competition law all play a role in deals. You must know which ones apply in your country.
Final Tips for Practitioners
Helping a client through due diligence is a privilege. It is one of the most important moments in their business life. A few final reminders will keep both you and the client safe.
Start early. The best preparation begins six to twelve months before the deal even starts. Last minute clean-ups are never as good.
Be honest. If you find a problem, tell the client. Do not help them hide it. Hidden problems always come out, and your reputation is on the line.
Document everything. Keep clear notes of what you did, what you saw, and what you advised. If a dispute comes later, your file is your protection.
Know your limits. If the deal needs lawyers, tax specialists, or valuation experts, bring them in. You do not have to do everything yourself.
Communicate. Talk to the client often. Talk to their advisors. Confusion is the enemy of a smooth deal.
A well prepared client gets a better price, closes the deal faster, and walks away with fewer worries. Your role as a trusted advisor is to make sure that happens. With clean records, the right standards followed, and honest communication, due diligence becomes a process the client can handle with confidence rather than fear.
