What diligence is for
Due diligence is the process of finding out whether the business is what the seller says it is, whether it can be transferred, and what it will cost to own. In most industries the first question dominates. In gambling the second and third are at least as important, because a business that cannot be transferred is worth nothing to the buyer, and a business whose regulatory and tax liabilities crystallise after closing can cost more than it was bought for.
Diligence is organised in workstreams, each producing a report and a list of findings graded by severity. The findings feed the price, the structure and the closing conditions. This lesson covers the workstreams that are specific to gambling or behave differently in it.
Regulatory diligence
This is the workstream that does not exist in most sectors and dominates in this one. It answers:
Which licences does the target hold, in which entities, and what are their conditions? Licences are often held by subsidiaries; the buyer needs to know which entity is licensed for what, whether the corporate structure the deal proposes keeps the licence in a licensed entity, and what conditions and undertakings attach.
What is the change-of-control process for each? In some jurisdictions a change of control transaction requires the prior approval of the gaming authorities, and the acquirer and its controlling shareholders, officers and directors may have to be investigated and licensed; others act after the event. In Britain, when a person becomes a controller of a company holding an operating licence, the company must inform the Commission and either surrender the licence or apply for a determination that the licence continues, which the Commission makes only if it would have granted the licence with the new controller in place, and otherwise revokes the licence; failing to act within five weeks, unless the Commission extends that period, also leads to revocation. In effect the change of control is assessed as if it were a new application. Timelines differ from regulator to regulator. The answer for each licence sets the closing timetable and the conditions precedent.
What is the target's regulatory history? Every investigation, sanction, fine, licence review, warning letter, regulatory return that was late and remedial plan that was agreed. A pattern of findings is a suitability risk for the buyer, and an unresolved investigation is a contingent liability.
Where does the revenue actually come from? Revenue by customer jurisdiction, matched against the licences held. Revenue from jurisdictions without a licence is the grey-market question from the valuation lesson, and it is also a suitability question: a buyer whose own regulators consider those markets illegal may not be able to own the target without exiting them.
Are the key people suitable? Directors, senior managers and significant shareholders of the target will have been assessed by its regulators; the buyer's regulators will assess them again. In Britain, the appointment of a person to a key position, and any person becoming a holder of 5% or more of the shares or voting rights of the licensee or its holding company, are key events the licensee must notify to the Commission within five working days. A person the buyer's home regulator has previously declined to approve is a problem to surface early.
Financial and tax diligence
Beyond the ordinary quality-of-earnings work, gambling adds:
Player funds. Regulated markets commonly require customer balances to be held separately from operating cash, in a segregated account or a trust. In Britain, remote operators must hold customer funds in a separate client bank account, and must tell customers, under the Commission's rating system, whether those funds are protected if the operator becomes insolvent and at what level. A separate account is not the same as insolvency protection: an operator may declare its funds 'not protected', provided it reminds customers of that every six months. The buyer must verify that the balances are actually segregated as claimed, that the amounts reconcile to the player ledger, and that no operating cash has been drawn from them. A shortfall here is a regulatory breach and a liability the buyer inherits.
Gaming tax. Rates, bases and filing history in every market, with attention to whether bonuses were deducted correctly, whether point-of-consumption taxes were applied to the right customers, and whether any market's tax authority has an open enquiry. Gaming tax assessments can be raised well after the period they relate to.
Bonus liability and loyalty balances. Outstanding bonuses, free bets and loyalty points are liabilities the buyer takes on. They should be on the balance sheet at the expected cost, and the buyer should check that they are.
Affiliate and marketing commitments. Revenue-share affiliate deals typically pay the affiliate a pre-agreed share of the net gaming revenue generated by the players it referred, over the time those players spend with the operator, as one listed affiliate describes its own revenue-share model. A target with a large base of revenue-share customers has a long-lived cost the P&L shows as marketing and the buyer should see as a lien on part of the revenue.
Payment processing. Chargeback history, reserves held by acquirers, processing agreements that terminate on change of control, and any use of processors whose own compliance would not survive scrutiny.
Anti-money-laundering and responsible gambling
The AML workstream reviews the target's risk assessment, customer due diligence procedures, transaction monitoring, source-of-funds practices, suspicious activity reporting and training. In Britain, casino operators are within the Money Laundering Regulations 2017, which require an assessment of the business's money laundering and terrorist financing risks, with an up-to-date written record of the steps taken and policies, controls and procedures approved by senior management. The buyer is looking for the gap between the written policy and the practice, and the fastest way to find it is to pull a sample of high-value customer files and check them against the policy.
Responsible gambling diligence does the same for affordability checks, interaction records, self-exclusion handling and the treatment of customers showing markers of harm. Failings of this kind have produced large penalties: in March 2023 three William Hill Group businesses agreed to pay £19.2 million for social responsibility and anti-money-laundering failures, then the largest enforcement action by Britain's Gambling Commission, which said it had given serious consideration to licence suspension. The reputational cost can be larger still. A target with a customer base built on a small number of very high-value players carries this risk concentrated.
Technology and IP
The questions are who owns the platform, what depends on third parties, and what the migration cost will be.
Ownership. Is the sportsbook or casino platform proprietary, licensed, or a mix? If licensed, does the agreement survive change of control and what does it cost to exit? Proprietary platforms have their own risk: key-person dependency and technical debt that only shows in the code.
Content and data. Game content and sports data are licensed from third parties on terms that may contain change-of-control clauses or most-favoured-customer provisions the buyer's own agreements would breach.
Security and data protection. Breach history, penetration test results, and compliance with data protection law in every market. A breach discovered after closing is the buyer's to disclose: under the UK GDPR a controller must notify the regulator without undue delay and, where feasible, within 72 hours of becoming aware of a personal data breach, unless it is unlikely to result in a risk to individuals.
Migration. If the plan is to move the target's customers onto the buyer's platform, the diligence should estimate the cost and the customer loss, because it is often the largest single execution risk in a consolidation deal.
Commercial diligence
Cohort analysis, as set out in the valuation lesson, is the core. Alongside it: customer concentration (the share of NGR from the top hundred customers, and whether those customers are the ones the responsible gambling review flagged), product mix, market-by-market competitive position, and acquisition cost trends. In affiliate deals the commercial diligence is search: the source of traffic by page, the ranking history, the link profile, and the exposure to a single search engine's next update.
From findings to the deal
Every finding lands in one of four places: the price (a quantifiable liability reduces it), the structure (an uncertain liability becomes an escrow, an indemnity or an earnout), the conditions (a regulatory matter becomes a condition precedent or a pre-closing covenant), or the walk-away list. The buyer's job is to keep the list of findings and the list of deal terms in one place so that nothing found in diligence fails to appear in the contract. The next lesson is the contract.