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Search Fund – Due Diligence

By Simon Martin
22nd Feb 2024


Buying and selling a business can be a complex process, often involving an array of moving parts and key decisions. Here at Ensors, we’ve invested in building a dedicated team to alleviate some of the pressures associated with buying and selling business’ through our Due Diligence service offering.  We’re here to provide peace of mind to those looking to make acquisitions.

There has been a noticeable increase in Search Fund activity across the UK and European M&A market in recent years. Due to the flexible, yet focussed nature of Search Funds, they are becoming an increasingly attractive exit option to many business owners, who do not wish to sell to the traditional private equity firms.

From our previous work with Search Funds and business owners, we can appreciate the time, effort and expense that goes into identifying the right acquisition target for Search Funds. Therefore, we believe that no stone should be left unturned when purchasing a business, our range of due diligence services look to aid Search Funds in getting comfortable with the business they are looking to acquire.

Our Services:

Our Corporate Finance team are experienced professionals specialising in the Due Diligence process, having worked with a variety of clients including, corporate entities, traditional private equity firms and Search Funds previously. The Corporate Finance team have assisted with the provision of both buy side Financial Due Diligence and Tax Due Diligence services.

Financial Due Diligence (FDD) is a key aspect of any acquisition process as it allows the buyer to reach a level of comfortability and peace of mind that the assumptions they have made about the financial health and performance of the business they are acquiring, are factual and supported. The Financial Due Diligence process also looks identify any financial misrepresentations or accounting issues within the business, this gives the buyer the opportunity to flag these to the business being acquired and have them rectified, therefore, eliminating the risk of the buyer acquiring a business with these financial red flags.

We offer a bespoke approach to all Financial Due Diligence projects we are involved with; our typical service offering looks to examine and analyse the financial and operational aspects of the target business. This may include:

  • Analysis of historical profit and loss performance
  • Analysis of historical assets and liabilities
  • Maintainable earnings calculations and analysis
  • Working capital analysis
  • Cash flow analysis and forecasting
  • Review of customers and suppliers
  • Forecasts and assumptions for future profit and loss
  • Forecasts and assumptions for future balance sheets
  • Covenant reviews
  • Sensitivity analysis

Tax Due Diligence (TDD) is another key aspect of the acquisition process. When acquiring a business, the financial statements will be readily available, however, the tax affairs of the target company are often less accessible and require careful consideration. Due to the complex and ever-changing nature of tax legislation, it is very easy for business’ to both intentionally and un-intentionally fall on the wrong side of tax legislation, treatment and risks. Therefore, part of Ensors Due Diligence offering is Tax Due Diligence. This offering is a collaboration of both the Corporate Finance and Corporate Tax teams, who work in conjunction to evaluate the tax affairs of the business being acquired.

Similar to our approach to Financial Due Diligence, we can appreciate the assortment of tax topics or potential issues that may arise upon our review, hence our bespoke approach and scope to each engagement. Our experts are experienced and qualified to deal with whatever tax issues the Due Diligence process may involve. Some of the more common red flags we see within our Tax Due Diligence work would include, historical tax compliance and risks, research and development (R&D) claims and treatment of contractors.

HMRC have the power to enquire into a business’ tax affairs if they believe there to be an error. The standard timeframe for HMRC to raise a discovery assessment is four years from the end of the financial year, however, this is extended to six years in cases where careless errors have occurred. Therefore, when acquiring a business, a Search Fund incurs the risk of acquiring the targets pre-existing tax compliance issues, if the appropriate actions are not taken to identify and rectify these prior to the deal completing. Our team can help to review and identify any tax compliance risks, giving you peace of mind that HMRC won’t be knocking on your door, after the acquisition, in relation to historic tax compliance errors.

R&D claims have come under particular scrutiny by HMRC in recent years, this is largely due to pop-up firms providing improper R&D advice and completing incorrect R&D claims for contingent fees. When combined with the changes to the R&D scheme itself, this can be an area of tax that causes significant issues and is often investigated by HMRC. Therefore, our team here at Ensors is fully equipped to assist in reviewing R&D claims and their validity, as well as any transfer pricing, patent box or VAT issues, that may arise.

If you are Search Fund looking, or already in the process of making an acquisition, please don’t hesitate to reach out to Simon.Martin@ensors.co.uk or Lewis.Dyer@ensors.co.uk,  in order to discuss your Due Diligence requirements and how we can be of help.