Due Diligence on an Electrical Business: The List and the Order

The OrderDiligence arrives in an order, and it is not the one you expect

The first requests are financial and they come quickly after heads of terms: statutory accounts for three years, this year's management accounts month by month, debtor and creditor ageing, the bank facilities, and revenue broken down by client. None of that is unusual and most owners can produce it inside a week. It also tells the buyer very little they did not already assume.

The second wave is where the real examination starts, and it is commercial. Revenue split between recurring and project work with the definitions stated, the contract register, client concentration over three years, the pipeline with its probability weighting, and the margin by type of work. A buyer is testing whether the story told in the first meeting holds up when the underlying numbers are cut differently.

The third wave is compliance, employment and legal, running in parallel and usually handled by different advisers. Scheme registration and the last assessment report, insurance history and claims, certification records, health and safety documentation and the accident book, employment contracts and records, leases, vehicle finance, Construction Industry Scheme returns, disputes and warranty exposure. This is the wave where timetables slip, because it is the one owners have never assembled before and the one where a missing document cannot be produced by working late.

The Long PolesThe items that take months rather than days

Work in progress and retentions come first on that list and they cause more price adjustments than anything else. A buyer wants every retention identified with its client, its value, the date the defects liability period ends and the history of what has actually been recovered. Where the answer is a figure in the accounts and no supporting schedule, the buyer's accountant will build one, and their assumptions will be more conservative than yours.

The certification archive is the second. Six years of installation certificates, minor works certificates and condition reports, findable by client and by date, is a straightforward request and an enormous exercise if the filing has drifted. Related to it is the record of outstanding observations: open C1 and C2 items on client sites are read as liability, and the closing out of them cannot be done in the fortnight a buyer gives you.

Employment records are the third. Contracts for everybody including the long-serving engineer who never had one, right to work documentation, ECS card and JIB grade records with expiry dates, holiday and overtime arrangements as actually operated rather than as written, and any understanding with an individual that has never been documented. Each gap becomes a warranty question, and warranty questions become money held back at completion.

The fourth is the set of agreements you have not read in years. Framework appointments and their change of control clauses, client terms that may have been superseded by a purchase order, supplier agreements with personal guarantees attached, the lease, and anything signed with a family member or a related company. Reading them before a buyer does is the cheapest hour available in the whole process.

The HabitWhat actually makes diligence short

Speed of answer, more than anything else. A question answered the same day keeps a deal moving and keeps the buyer's assumptions charitable. The same question answered in ten days invites the adviser to wonder what took so long, and once a diligence team starts assuming there is a reason for delay, every subsequent gap is read in that light. Momentum is not a soft factor in a sale. Deals that drift lose people, lose funding approvals and lose the enthusiasm that got them agreed.

The second thing is consistency. The figures in the management accounts should reconcile to the contract register, the contract register to the certificates, and the certificates to the invoices. Where they do not, say so first and explain why, because a discrepancy volunteered is an explanation and a discrepancy discovered is a finding.

The third is having done it once already. Owners who assemble the pack a year before they go to market discover the gaps at leisure and fix most of them for nothing, because a missing contract can be put in place quietly when nobody is waiting for it. Owners who assemble it during diligence discover the same gaps under a deadline, in front of the person deciding the price, and every fix then looks like a repair rather than a routine. Nothing about the list is secret, which is exactly why there is no excuse for meeting it cold.

A discrepancy volunteered is an explanation, and a discrepancy discovered is a finding.