What does financial due diligence examine?
Financial due diligence investigates the financial information and assumptions behind a proposed transaction. It can help buyers, sellers and funders understand performance, identify questions and assess the financial case. The appropriate work depends on the deal, access to records, information quality and the intended users.
Buyer-side and seller-side questions differ
A buyer may want to test the sustainability of trading, working capital requirements and obligations affecting funding. A seller may want to organise evidence, reconcile figures and understand questions likely to arise. Agree whether the instruction concerns buyer analysis, seller preparation or a specified report; these are not interchangeable deliverables.
Start with the transaction and its assumptions
Explain what is being bought or sold, the proposed price basis, funding arrangements, timetable and concerns. Identify the entity or group perimeter and any excluded assets. The review should address the actual deal hypothesis, rather than produce a standard pack without a defined purpose.
Separate the workstreams and reliance terms
Financial due diligence does not automatically include legal, commercial, tax, technical or regulatory due diligence. Valuation and audit are also separate questions. Agree responsibilities between advisers and identify intended recipients and reliance requirements before work starts. No engagement guarantees that every risk will be discovered.
A focused financial due diligence scope
| Workstream | Questions to investigate |
|---|---|
| Trading and earnings | Do trends reconcile, and which earnings are sustainable? |
| Cash conversion | How do reported profits turn into cash? |
| Working capital | What funding is required to operate the business? |
| Debt and obligations | Which balances and commitments affect the transaction? |
| Accounting judgements | Which estimates, policies or changes need explanation? |
| Information gaps | What remains unverified, unavailable or dependent on assumptions? |
These are starting questions, not a promise that every engagement includes each area. Access and findings can change the appropriate scope.
A useful next step before commissioning
Bring the transaction outline, current and historical financial information, management explanations, timetable and any draft terms. Identify which records are missing and who can answer questions. We assess suitability, conflicts, information access, deliverables and the fee before accepting the work.
Explore Quality of Earnings, management reporting and funding information preparation.