3 Mins
At some stage in the lifecycle of a business, owners will likely need to prepare a business plan for a trade sale or other change in ownership. At Henderson Loggie, we assist in all aspects of this process. However, many business owners are unprepared for lender-instructed Financial Due Diligence (FDD) when borrowing is required to facilitate a transaction.
If a business seeks borrowing—especially leveraged or unsecured lending—the lender may commission independent FDD as part of its review. While financial metrics such as EBITDA, working capital, and cash flow are critical, non-financial factors are equally important in a lender’s decision-making process. Key areas such as customer concentration, management strength, and financial reporting capabilities often undergo scrutiny.
Customer Concentration: Key Risks & Mitigants
A thorough profile of the customer base should be prepared, detailing:
- Key customers and their relationship to the business (including group-level dependencies)
- Contract details, including start and expiry dates, renewal terms, and churn rates
- The tender and procurement processes
Supporting materials should include:
- An overview of key contracts and termination clauses
- Customer referencing where applicable
- An assessment of competition and the risk of contract migration to alternative providers
- Analysis of downside scenarios, such as the loss of one or more key contracts, including management’s planned response, financial runway, and covenant impact
- Management Information (MI) highlighting revenue trends broken down by key contracts
If customer concentration poses a potential risk, mitigation strategies must be well-documented and substantiated. These should go beyond high-level assurances (e.g., “we have a great relationship”) and include:
- Customer referencing outcomes
- Contractual safeguards (e.g., long-term contracts with no break clauses)
- The degree of integration with key customers (e.g., reliance on proprietary technology or embedded services)
- A detailed impact assessment in the event of contract losses
Management & Finance Function: Ensuring Readiness
In many cases, an external advisor may lead the transactional process, and financial models may be prepared by third parties rather than the business’s own Finance Director (FD). Post-transaction, these advisors typically step away, making it crucial to assess the business’s internal finance capabilities.
Key areas for assessment include:
- Management preparedness: Evaluating the FD’s knowledge of forecasting, working capital, and financial reporting
- Quality of MI: Ensuring the business regularly produces high-quality MI and tests financial covenants
- Accounting systems & processes: Reviewing whether accounting practices align with lender expectations, including the accuracy of financial models and reconciliations
Potential risks include:
- Limited experience with bank debt/covenants: Understanding management’s familiarity with finance documents and covenant definitions
- Absence of a Finance Director: Identifying the impact of this gap and whether financial reporting is outsourced
- Limited M&A experience: Evaluating management’s ability to integrate acquisitions and align financial reporting systems
- Budgeting accuracy: Examining historical variances between budgeted and actual financial performance
- Cash management discipline: Assessing liquidity management and any trends in debtor days due to poor invoicing practices
Preparing for a Thorough Review
Business owners should anticipate a rigorous review process and challenging questions. Proper preparation is essential, and our team at Henderson Loggie is well-equipped to guide businesses through this process.
Additionally, our Corporate Finance team collaborates directly with lenders to prepare meaningful FDD scopes, ensuring robust diligence with clearly identified key risks and mitigants.
Whether you are a business owner preparing for due diligence or a lender requiring an in-depth review, we would be delighted to assist. Please reach out to explore how we can support your needs.
Corporate Finance Director
I have worked in banking and finance for more than 30 years, supporting and advising SMEs on growth funding and leverage finance. Excellent client service is at the heart of everything that I do.
My focus is now on Transaction Advisory on buy and sell side deals for Scottish owner-managed SMEs and Transaction Support including financial due diligence for corporate buyers, financial investors and government bodies.