Diligence the business you will actually own

What it means

Due diligence is the investigation that tests the assumptions behind an acquisition. The source describes financial, commercial and legal workstreams: examining monthly accounts and bank records, understanding customer contracts and asking detailed questions about obligations. Those workstreams support different decisions; a lender’s review does not automatically answer every question the buyer should consider. Watch source Watch source

Diligence also has a time dimension. A business can change during a lengthy transaction. Financial information that supported an initial offer may no longer describe the company approaching completion. The source includes a lender almost withdrawing after refreshed monthly accounts exposed deteriorating trading. Watch source

Why it matters

Small revenue changes can have large profit consequences. Sey recounts an acquisition that failed after a customer loss shortly before closing. One account describes 20% of sales and all profit disappearing; another discusses 25–30% of revenue. Those versions may concern the same event, but the supplied material does not justify merging them into one exact figure. Watch source

Information quality is itself an issue to investigate. Sey identifies unreliable or incomplete management reporting as a recurring obstacle. If you cannot reconcile a compelling earnings story to actual records, increasing the detail of the forecast will not fix the missing foundation. Watch source

How it works

Begin with the claim driving the price: sustainable earnings. Trace it through monthly profit-and-loss statements, balance sheets and relevant bank evidence. Identify proposed adjustments and ask what supports them. The source’s financial-diligence description emphasizes reconciliation and continuity, rather than accepting the annual headline in isolation. Watch source

Then test the commercial mechanism. Who generates sales, what customer commitments exist, and what could interrupt delivery or payment? Bring operating expertise into the process early. In a later discussion, CEO Paul says operations had previously joined too late and might have identified issues earlier. That experience supports a practical change in participation, not a guarantee that every problem becomes detectable. Watch source

Practical interpretation

Maintain an assumptions register with the claim, supporting document, unresolved question and decision consequence. This editorial tool turns the source’s diligence workstreams into a usable review process. A missing customer contract should lead to a defined question about revenue continuity; it should not disappear into a generic list of documents received. Watch source

Repeat key checks close to completion. Ask what has changed in trading, customer relationships and cash since the initial review. The source’s near-withdrawal of lender support shows why updated monthly information can matter even after substantial legal work has been done. Watch source

A worked example

Hypothetical stress test inspired by the reported customer loss. A company has £5m sales and £500,000 operating profit. One customer supplies £1m of those sales. After subtracting the costs the company could avoid if that customer left, the customer contributes £500,000 toward the company’s remaining costs and profit. If the customer leaves and those remaining costs stay unchanged, the company loses £500,000 of contribution—eliminating its stated operating profit. These invented assumptions explain the mechanism; they do not reconstruct Sey’s transaction. Watch source

The next diligence task is to investigate actual customer contribution, contract terms and cost flexibility. A revenue concentration percentage alone does not reveal the full earnings effect. Treat the calculation as a question generator rather than a forecast.

Common mistakes

Do not describe an adverse trading event during diligence as a problem necessarily discovered by diligence. Do not assume a long customer relationship prevents termination. And do not adopt the speaker’s dismissive opinions about environmental or other specialist review as evidence those risks are immaterial. The collection does not provide a complete legal, tax, environmental or technical diligence framework. Watch source Watch source

Customer concentration tests dependence. Adjusted EBITDA tests earnings quality, while management asks whether operational knowledge and key people survive the change in ownership.

Further viewing

Start with the three-workstream explanation and then compare the later operating-participation discussion. Preserve uncertainty where different accounts give different figures for an apparently similar event.