Due diligence on a distressed business
You have 72 hours, one site visit and no warranties. Here is the exact DD checklist Sell Ltd buyers use to make defensible decisions under distressed-deal time pressure.
Full employee schedule with names, dates of start, salary, holiday accrual, notice period, contractual bonuses, pension arrangements. Any redundancies in last 90 days (collective consultation risk). Directors' service contracts and change-of-control clauses.
Top 10 customers by revenue and top 10 suppliers by spend. Change-of-control clauses. Personal guarantees given by directors. Long-term commitments (IT, telco, insurance). Notice periods and termination triggers.
Registered trademarks (UK and EUIPO), domain registrations (WHOIS), social media accounts (ownership), software licences (transferable?), source code and IP assignment history from developers.
Latest management accounts, aged debtor and creditor lists, bank statements last 90 days, cash burn rate, working capital cycle, VAT position, PAYE/NIC arrears, HMRC time-to-pay arrangements.
The 72-hour DD schedule
- Hour 0–8: Data-room ingest. Read management accounts, employee list, top-10 contracts.
- Hour 8–24: Financial model — TUPE cost, 90-day cash burn, working capital ask.
- Hour 24–36: Site visit. Ops walkaround, IT audit, stock verification.
- Hour 36–48: Legal review of top contracts (change-of-control, TUPE, IP assignment history).
- Hour 48–60: Supplier and top-customer phone calls (with administrator's consent).
- Hour 60–72: Q&A log finalised. Offer letter drafted. Funding letter refreshed.
Related
Frequently asked questions
How is distressed DD different from normal M&A DD?
Time. Distressed DD compresses a 3-month DD process into 72 hours. Buyers focus on deal-breakers, not warranty schedules. There are no warranties in a distressed APA — you buy what you see.
What are the top three DD priorities?
(1) TUPE headcount and payroll cost, because it lands on your balance sheet the moment you complete. (2) Key customer contracts and change-of-control clauses. (3) Cash burn until you can reset supplier terms.
How do I DD accounts if none exist?
Ask the administrator for the last statutory accounts (Companies House), the last management accounts prepared by the company, and a Statement of Affairs (Sch B1 para 47). Reconcile against the aged debtor and creditor ledgers.
What red flags kill a deal?
(a) Concentrated customer base (>40% from one customer) with a change-of-control clause. (b) Unregistered IP assigned to a director personally. (c) TUPE headcount that exceeds the buyer's payroll capacity. (d) Any regulatory investigation or FCA/HMRC letter.
Can I do site visits?
Yes — the administrator usually arranges one supervised visit to the main premises. Bring an operations lead, an IT lead and a facilities checklist. This is often the highest-signal 3 hours in the entire DD.
What about the pension?
For DB schemes, engage the Pensions Regulator's clearance process early — this is often what stalls distressed deals. For DC schemes, TUPE ports the auto-enrolment obligation to the buyer.
How do I DD supplier relationships?
Call the top 10 suppliers directly (with the administrator's consent). Ask about pro-forma terms, credit position, and appetite to continue supplying. This is DD you will not get from the data room.
What about ongoing litigation?
Litigation liabilities stay with the insolvent shell in an asset purchase. But injunctive relief (e.g. injunctions over IP use) can bind the buyer as successor. Ask for a claims register and cross-reference against Court Service records.
Do I need environmental DD?
For any manufacturing or property-holding business, yes. Environmental liabilities under s.79 EPA 1990 can bind an acquirer of contaminated land. Cheap Phase 1 desk-based assessments cost £2–5k and are always worth it.
How do I evidence my DD to future finance providers?
Keep a DD file with dated notes, redlines and Q&A logs. Post-completion refinancing and any future exit will require a DD trail. Also useful if a creditor challenges the sale under Sch B1 para 74.