Independent deal scrutiny tests the assumptions a seller-prepared information memorandum invites buyers to accept. The seller's adviser is not dishonest; they are advocates. Their job is to present the asset attractively. The buyer's independent reviewer looks at the same numbers with a different question: what does the asset look like once optimistic assumptions are stripped out and the working capital position is corrected for normalised levels?
In this article
- Why does the buyer need independent scrutiny?
- What patterns recur in seller-prepared materials?
- How is working capital normalised?
- What counts as a genuine one-off?
- How are sponsor assumptions tested?
- What does a deal-scrutiny engagement actually look like?
Why does the buyer need independent scrutiny?
The seller's adviser owes the seller. Even with full integrity, that engagement is structured around presenting the asset in its best plausible light. Add-backs are added back, normalisations smooth out volatility, and the implied multiple is calibrated against benchmark deals chosen for their flattering comparison. None of this is improper. It is what selling a business looks like. The buyer's job is to understand what the same data looks like under a different lens.
That different lens is what independent scrutiny provides. Not adversarial diligence, that comes later, but a calibrated, forensic re-reading of the same numbers, with explicit views on what to accept, what to challenge, and what to price into the offer. According to the 2024 BDO M&A Outlook for UK mid-market, around 31% of buyers reported that independent pre-LOI scrutiny shifted their bid by more than 5% in the previous 12 months.
What patterns recur in seller-prepared materials?
Five patterns recur with such regularity that they are almost diagnostic. EBITDA add-backs that aggregate into a number larger than reported profit. Working capital presented at a point-in-time low rather than a normalised average. Customer concentration described as "diversified" when one or two customers drive a meaningful share of margin. Forecast assumptions that reverse a recent trend without a clear catalyst. Cost lines that appear flat across the forecast despite known wage and rent inflation.
None of these is necessarily wrong. Each one is worth testing. The honest answer is sometimes that the seller's view is reasonable; more often it is reasonable with caveats; occasionally it is not reasonable at all. The buyer who has tested before bidding has the leverage to negotiate; the buyer who tests during exclusivity is negotiating from weakness.
How is working capital normalised?
The normalised working capital position is the level required to operate the business in the ordinary course. Sellers naturally minimise this number because the residual cash sits in the equity bridge. Buyers naturally want to maximise it. The defensible answer is the trailing 24-month average adjusted for known structural changes (a contract renegotiation, a new payment terms policy, a step-change in inventory).
The common pattern in a seller-prepared bridge is that the working capital figure was selected from the most favourable month of the most favourable quarter. Independent scrutiny tests against the longer trailing average and identifies the gap. That gap is real money, usually 1% to 3% of enterprise value, and is recovered through negotiation at the LOI or final-offer stage rather than left on the table.
What counts as a genuine one-off?
The line is whether the cost or revenue would recur in a normalised year. Genuine one-offs include unusual legal settlements, exceptional restructuring costs, completion bonuses, and lease-break costs. Disputed one-offs include "abnormal" bad debts in a sector where bad debt is expected, founder bonuses being added back when the role will be replaced at salary cost, and capex described as exceptional that is in fact part of the normal maintenance cycle.
The diagnostic test is to ask whether the activity exists in the next 24 months at any level. If it does, an add-back is hard to justify. The number that survives this test is usually 60% to 80% of the seller's claimed adjusted EBITDA, and the difference compounds significantly through the multiple.
How are sponsor assumptions tested?
Sponsor assumptions are the forward view: revenue growth, margin expansion, capex requirement and synergy capture. Each is tested against three things, the trailing actuals, the market evidence, and the operational capacity to deliver. A 12% growth assumption against a 3% trailing trend with no new product launches and no expanded capacity is a model that needs to be re-built rather than tweaked.
The harder test is internal consistency. Many models grow revenue without growing capex, expand margin without changing product mix, and reduce working capital intensity without renegotiating with customers or suppliers. The honest model shows the levers being pulled. The optimistic model shows the outcome without the inputs.
What does a deal-scrutiny engagement actually look like?
A pre-LOI scrutiny engagement is typically two to three weeks. The output is a short memo (8 to 15 pages) covering: a normalised view of trailing EBITDA, a tested view of the working capital bridge, a testing of the forecast assumptions, identification of the three to five issues most likely to materialise in formal due diligence, and a recommended bid range with the underlying logic. The deliverable supports the bid decision; it does not replace the formal financial DD that follows.
The cost is small relative to the value. A typical engagement costs £15k to £40k. The shift in bid position averages 3% to 8% of enterprise value. The economics rarely require detailed justification. The harder challenge is getting the work done early enough to influence the decision.
Written by Bharat Varsani FCCA. Director of Key Ledgers Global. CPR Part 35 Forensic Expert Witness with 20+ years of advisory across acquisitions, restructurings and contested valuations. Currently operating at CFO level within a 15-entity care and property group.
Sources: BDO UK M&A Outlook 2024 mid-market survey for the cited 31% bid-shift figure; published practice guidance from the Quoted Companies Alliance on pre-deal scrutiny standards.
Frequently asked questions
Is deal scrutiny the same as financial due diligence?
No. Deal scrutiny is the pre-LOI calibrated review that informs the bid. Financial due diligence is the formal exclusivity-period exercise that confirms or revises the position. The two are sequential and serve different decisions.
Should the seller's adviser be present during scrutiny?
No. Scrutiny is the buyer's independent work and the output is for the buyer's bid decision. The seller's adviser is involved in the formal DD process that follows, not in the buyer's pre-bid analysis.
What is a reasonable cost for pre-LOI scrutiny on a £20m deal?
£20k to £35k is the typical range for a focused two-to-three week engagement on a deal of that size. The cost is materially smaller than the typical bid shift it produces and should not be the limiting factor.