Financial Due Diligence

Financial due diligence reviews the figures, earnings power, and financial position of a target company. It clarifies whether the reported profits are reliable and where financial risks exist. The results are a central basis for the price and purchase decision.

At its centre is the quality of earnings analysis, in which each element of the result is tested for whether it is sustainable, one-off or purely accounting-driven. This produces the adjusted EBITDA that then serves as the basis for the purchase price. The second focus is working capital, examined monthly over at least twelve and preferably 24 months to reveal seasonality and derive a normalised target level for the price adjustment. The third is net financial debt including all debt-like items, which feed one for one into the equity bridge. Added to these are analysis of cash flow and its conversion, review of investment needs, breakdowns of revenue and margin by product and customer, and a critical assessment of the business plan against the accuracy of earlier forecasts. The report is typically structured as a description with findings and contains no audit opinion.

Unlike the statutory auditor, who confirms that accounting is proper, financial due diligence asks whether the figures are economically robust for a buyer. Its findings translate directly into price, warranties, indemnities and holdbacks. The sequence matters in practice: an extensive data package is requested first and used to build a database allowing analysis by product, customer, region and month. Only then do the actual analyses begin. This is precisely where many mid-market processes stall, because the required analyses do not exist in the accounting system and must be created with considerable effort. Preparing that data foundation early is therefore one of the most effective contributions to process speed.