Cyber Security and Data Privacy Due Diligence: The Quiet Deal-Breaker in Modern SME Sales
Cyber Security and Data Privacy Due Diligence: The Quiet Deal-Breaker in Modern SME Sales
When preparing to sell your business, it’s natural to focus on the numbers. You make sure your accounts are in order, your adjusted EBITDA is accurate, and your customer contracts are solid.
Yet, there is another area buyers are increasingly scrutinising before they sign on the dotted line: your cyber security and data privacy.
In the past, IT due diligence was often a quick checkbox exercise. Today, it has become a core component of the M&A process. Here is what cyber due diligence involves, what buyers look for, and why getting it wrong can hurt your business's value.
Why do buyers care about your IT?
If a buyer is acquiring your company through a Share Sale, they take on the corporate entity in its entirety. That means they inherit all historical liabilities alongside the business assets.
If your company operates with weak security, outdated software, or non-compliant data practices, the buyer directly inherits that risk. A subsequent data breach or regulatory fine from the Information Commissioner's Office (ICO) becomes their problem to resolve. To safeguard their investment, buyers routinely instruct specialist technical advisors to audit your systems.
What are buyers looking for?
During due diligence, a buyer’s technical team typically examines three main areas:
- Data Protection & GDPR: Are you collecting and storing customer and employee data legally? Buyers will check your privacy policies, confirm how consent is managed, and ensure robust Data Processing Agreements (DPAs) are in place with third-party software providers.
- Basic IT Hygiene: Who has administrative access to your core systems? A common red flag is finding active accounts belonging to employees or contractors who left the business years ago. Buyers also look for standard security baselines, such as company-wide Multi-Factor Authentication (MFA) and device encryption.
- Incident History: Has your business experienced a ransomware attack, data leak, or phishing incident? If so, was it handled properly and reported if required? Concealing a past incident is far more damaging to deal momentum than the incident itself once discovered.
How can a poor cyber review affect your sale?
Issues identified during IT due diligence rarely kill a transaction outright, but they frequently alter the commercial terms in the buyer's favour:
- Price Chipping: If a buyer calculates that your systems require immediate upgrades or remediation work post-completion, they will likely look to deduct that cost directly from the headline price.
- Specific Indemnities: If your data compliance looks uncertain, buyer solicitors will push for specific, often uncapped indemnities in the Share Purchase Agreement (SPA). This keeps you personally on the hook for potential claims or fines long after the sale closes.
- Deal Delays: Pausing negotiations to conduct additional technical investigations drains momentum. In corporate transactions, extended delays heighten deal fatigue and leave transactions vulnerable to external market shifts.
How to get your business ready
You do not need to overhaul your entire infrastructure overnight to be ready for technical diligence. Addressing a few fundamentals 6 to 12 months before going to market makes a significant difference:
- Audit access controls: Review all internal systems, shared folders, and cloud applications, removing credentials for former employees and inactive third parties.
- Review documentation: Ensure customer and staff privacy notices are current, accessible, and accurately reflect how your business handles personal data.
- Consider standard certification: Achieving a recognised standard like the UK government-backed Cyber Essentials demonstrates to prospective buyers that fundamental security controls are operational, instantly providing reassurance.
Proactively addressing your IT and data posture removes unnecessary hurdles early, reassuring buyers that they are acquiring a well-governed, resilient business primed for transition.
