Many business sales do not fail through lack of buyer interest — they fail because of problems the vendor knew about but underestimated. The Due Diligence phase, the SPA negotiation process and the timing of the sale are the three areas in which the most value is either destroyed or preserved. Those who understand these pitfalls can avoid them.
The Due Diligence phase: the most critical moment in the process
Once a buyer has submitted an indicative offer, the process known as Due Diligence commences — a systematic examination of the business from financial, legal, tax, commercial and human resources perspectives. For the vendor, it feels like an X-ray: nothing remains concealed.
Buyer teams typically examine the following workstreams in this phase:
- Financial DD: Revenue quality, EBITDA sustainability, working capital fluctuations, off-balance sheet liabilities
- Legal DD: Contractual arrangements, IP ownership rights, ongoing disputes, shareholder structure
- Tax DD: Historical tax exposures, tax audit risks, transfer pricing
- Commercial DD: Market position, competitive intensity, customer retention, pipeline
- HR DD: Key-person dependency, remuneration structure, redundancy risks
Typical findings that reduce valuations
Across hundreds of transactions, the same issues repeatedly emerge in Due Diligence as drivers of price reductions — or process termination:
- Unclear IP ownership: Was software developed by freelancers? Do the usage rights genuinely vest in the business? Where this is unclear, the buyer prices in the risk through a valuation discount.
- Customer concentration risk: Where a single customer accounts for more than 30% of revenue, this is a significant warning signal. Price reductions or earn-out structures typically follow.
- Absence of written contracts: Verbal arrangements with key customers or suppliers provide no security for the acquirer.
- Outstanding litigation: Ongoing claims or imminent disputes are priced in as contingent liabilities.
- Key-person dependency on the managing director: When the entire network, all client relationships and operational know-how are concentrated in a single individual, the buyer is right to ask: what am I actually acquiring?
Due Diligence surfaces what the vendor has long known — but hoped would go unnoticed. Professional preparation therefore does not begin in the data room, but two years beforehand.
Vendor Due Diligence: the proactive approach
Experienced vendors and their advisers turn the process on its head: rather than waiting for the buyer's findings, they commission a Vendor Due Diligence (VDD) themselves. An independent advisory firm examines the business from the buyer's perspective — before the first prospective acquirer enters the data room.
The advantage: issues are identified early and can be remediated. The VDD report is then made available to qualified buyers — this accelerates the process, builds confidence and materially reduces information asymmetry in negotiations.
Contractual pitfalls in the SPA: what counts after the handshake
The Share Purchase Agreement (SPA) is the central contractual instrument in a business sale — and one of the most complex legal documents a business owner will ever sign. The key pitfalls to watch for:
- Representations & Warranties: The vendor makes extensive representations about the state of the business. If it subsequently emerges that a representation was inaccurate, the vendor bears liability — often for several years post-closing.
- MAC clauses (Material Adverse Change): These clauses permit the buyer to withdraw from the agreement under certain circumstances if trading conditions deteriorate materially between signing and closing.
- Purchase price adjustment mechanisms: Under the Completion Accounts model, the final purchase price is only determined after closing on the basis of actual balance sheet figures — with significant potential for dispute. The Locked Box model, by contrast, fixes the price at a historical reference date and is generally more advantageous for the vendor.
Timing: why the point of sale determines everything
Perhaps the most costly mistake in a business sale is mistimed execution. Those who sell from a position of weakness — because a key client has departed, EBITDA is declining or a successor is urgently required — surrender their most important negotiating lever: choice.
The optimal point of sale is when EBITDA is at or near its all-time high, the market is favourably disposed and the vendor is acting from a position of strength. Those who miss this moment and sell under time pressure ultimately accept terms they would never have accepted in a well-prepared process.
A business sale is not an event — it is a process that begins two to three years before the actual transaction. Those who understand this and act accordingly have already set the most important points in the right direction.